A suspense account can be a valuable tool for managing uncertain transactions. It acts as a temporary placeholder until you can clarify the details. Here are some practical examples of how to effectively use a suspense account.
Example 1: Bank Reconciliation
During your monthly bank reconciliation, you record an adjusting journal entry (AJE) for bank service charges of $340 and interest income of $231. However, the bank statement shows an unexplained deposit of $500. Unsure whether this deposit is correct or a mistake, you can temporarily post the $500 to a suspense account. Here’s the journal entry (JE):
Two months later, you discover the deposit was an employee’s reimbursement for personal expenses incurred on a business trip. You then adjust the accounts as follows:
Example 2: Credit Card Payment
You need to pay a credit card bill of $7,267 but are unsure which expense account to charge a $172 item. The employee who can clarify is unavailable, but the JE must be made now. You can use a suspense account to temporarily hold the $172:
When you learn that the charge should be allocated to Supplies Expense, you adjust the accounts:
Classifying the Suspense Account
A suspense account can be classified as an asset, liability, revenue, or expense, but it’s typically a liability or expense. The purpose of a suspense account is to temporarily hold uncertain transactions until they can be correctly classified, ensuring accuracy before preparing financial statements.
Classifying as a Liability
- Advantage: Ensures the transaction won’t be overlooked before year-end, prompting investigation and reclassification.
- Disadvantage: Risk of the transaction being lost among other liability accounts.
Classifying as an Expense
- Advantage: As the last account in the chart of accounts, it’s less likely to be missed.
- Disadvantage: If overlooked, it might disappear before year-end adjustments.
Benefits of Using a Suspense Account
Posting unidentified transactions to a suspense account is more effective than using Miscellaneous Expense or Income. In those accounts, the transaction might get lost among other entries. A suspense account highlights the transaction, ensuring it’s reclassified correctly.
Freelance Bookkeepers
For freelance bookkeepers, a suspense account allows uninterrupted workflow while marking items for further investigation, ensuring accuracy for your clients.
Example 3: Reconciling Deposits
McDuffy Donuts sells items with odd prices and assures you that all deposits are sales. However, you know she often includes non-sale amounts. When reconciling her bank statements, you find deposits of $453.23, $938.30, and $1,000. A deposit of exactly $1,000 is unlikely to be sales. You can use a suspense account to hold this amount:
Later, you discover the $1,000 deposit was a loan. You then adjust the accounts:
If you had initially recorded the $1,000 as revenue, McDuffy would have mistakenly paid taxes on a loan.
Final Note
A suspense account is a temporary solution. Gather the missing information as soon as possible and ensure the suspense account is closed by the end of the year.
