Definition: An account that holds a given unidentified operation temporarily. It is a provisional account set to record an accounting transaction until its nature is properly recognized and classified.
What Does Suspense Account Mean?
From an accounting perspective, suspense accounts are used to reconcile the ledgers in the occasion that the nature of one or more transactions is unclear. For example, if a given deposit is received in the company’s bank account but there’s no record of a sale and the origin of the money is unknown the accountant can place this transaction in a suspense account until it can be properly classified.
Suspense accounts are commonly used when there is no paper trail for the transaction or the nature of it hasn’t been informed yet. Nevertheless, the size of these accounts should be fairly small since most transactions are easily categorized in a regular business operation. In the investment field, suspense accounts are also known as brokerages accounts set for short-term periods until the money is allocated in a client’s account; this is the case when a client is opening an account but its unique account number hasn’t been assigned yet.
Mr. Gladwell is the owner of a small bakery located in the suburbs. Each week he purchases some of the materials needed to manufacture the bakery’s products and he pays for them with the company’s debit card. Last week he purchased a new refrigerator for $300 but due to his busy schedule he failed to send the receipt of the transaction to his accountant.
At the end of the month, his accountant had to reconcile the bakery’s ledgers but there was a bank transaction of $300 that he had no record off. In order to file the monthly tax report on time he put this amount in a suspense account and the ledgers were reconciled perfectly.
After that, he consulted with Mr. Gladwell who clarified the nature of the operation. His accountant then reclassified the operation as a fixed asset purchase and the suspense account balance was removed.