A suspense account is used not to correct errors only but for other reasons. The account is naturally kept by every business to store transactions that the account(s) to post the event are not known. Suspense a/c can be used by trading and service firms. Banks, mortgage houses, and investment companies use this account.
Definition of Suspense Account
1. It can be defined as an account where a part of a transaction is kept for a while before it is posted to the correct account.
2. In accounting errors, the suspense account is the account used to keep the differences in the trial balance until the errors are detected and corrected.
An Account. A suspense account is similar to other accounts on the chart. In addition, it is part of a double entry. Therefore, an account will be debited for suspense to be credited and it should be debited for another account to be credited. However, this depends on the transaction.
Temporary account. It is used to keep a part of a transaction for some time. As a rule, the item in the suspense account should be removed at the end of the year. Or at most when the financial statement is made available to shareholders and other stakeholders.
Nonetheless, there are cases where transactions are in the suspense account after the year-end or the annual report has been prepared. This may be because a solution is not available to empty the account.
Used for accounting errors. A major way to use this account is to rectify accounting errors. I have written at length about accounting errors. Read more. In certain situations, mistakes will lead to the trial balance having differences. That is, the debit side will not equal the credit side. In such a case, the difference is placed in a suspense account. The difference in the trial balance is kept in suspense a/c till the causes of the disparities are known and corrected.
Uses of Suspense Account
It is used for the following reasons:
To keep part of transactions with undecided entry. When a transaction occurs in an entity and the accounts involved are unclear. If management has not decided on how to treat the item, a suspense account can be used to complete the transaction. For example, a company acquires new machinery for 5 million Naira. However, it is unclear if to classify the machinery with other types in the entity.
Here, the bank account will be credited and a suspense account debited until it is clear on how to deal with the transaction. This is better than keeping a source document for the transaction.
Correcting errors. It can be used to correct errors. It is used to correct mistakes that affect trial balance. Once the error is detected, the suspense account is debited or credited as the case may be to correct the error. All modifications will be done in a/c until the debit and credit side of the suspense a/c has the same amount.
To keep a transaction for further processing. For investment firms, a suspense account is used to keep a transaction of a client. For example, if a client sells its shares of a company and tells the investment entity that it plans to use the proceeds to buy shares of another company. The proceeds will be kept in suspense a/c temporarily. When the client has decided to buy the shares of the other company, then the transaction will be removed from the suspense account.
To keep part of an event till the transaction is complete. This means that it can be used to accumulate funds before they are posted to the right account(s). This can happen in mortgage banks. For example, if a mortgagor acquires a mortgage but pays for the one-time initial payment twice, the mortgage firm will put the sum in suspense till the full initial cash is paid.
Microfinance banks (MFB) in Nigeria also face this use. The regulators of MFB in Nigeria, do not allow these banks to recognize interest income until their client pays for the interest. For example, if a client was to pay 55000 Naira in May. Let’s say this amount includes the principal of NGN 45,000 and interest of NGN 10,000. If the client was unable to make the payment for May, the interest of NGN 10,000 will be kept in suspense a/c. It will be there till when the client pays for the sum.
In the final part, a suspense account serves as an account where transactions that have not to be finalized on its treatments, are kept. Once a decision is made on such transactions they are removed from the account. It is also used to correct errors that arise in a trial balance. A suspense account is used by all types of organizations. Banks, mortgage firms, investment entities, trading, and service businesses can use suspense accounts.