The Suspense account is best explained with an example:
Example 1: While completing your bank reconciliation, you will record an adjusting entry (AJE) for bank service charges of $340 and interest income of $231. But the bank statement also included an unexplained deposit of $500, which is either a mistake or needs to be checked out. Creating a Suspense account lets you keep working until you can get more information. The journal entry is as follows:
When you learn that the deposit was employee Alice’s reimbursement of what she paid for her husband’s hotel room on a business trip, you credit Travel Expense and close out the Suspense account, as follows:
Example 2: You are paying a credit card bill of $7,267 but don’t know which expense account to charge for a $172 item. The person who could explain the charge is unavailable for a few days, but you need to make the journal entry now. What can you do? Create a Suspense account and charge the $172 item to it:
When you learn that the charge goes to Expense Account No. 3, you debit this account and close out the Suspense account, as follows:
Classifying a Suspense account
Theoretically, a Suspense account may be classified as an asset, liability, revenue or expense, but usually, it is a liability or expense. It does not matter which because it is closed out with a zero balance before financial statements are prepared. Here are the pros and cons of these two classifications:
Classifying the account as a liability. Advantage: Assures that the account will not disappear at year end (when the expense accounts are closed out). Disadvantage: Increases the risk of the correct entry never being made because the account gets lost among the other liability accounts.
Classifying the account as an expense. The advantage is that as the last account in the chart of accounts, it is unlikely to be overlooked. The disadvantage: If it is overlooked, it will disappear at year-end before the correction is made.
Why a Suspense account is better
An amount posted to a suspense account is rarely overlooked. The same amount posted to, say, Miscellaneous Expense or Miscellaneous Income, may well be missed because the balance in these accounts includes other amounts and will not stand out in the trial balance. Thus, the questionable amounts may never be moved to the correct accounts.
When doing write up work or other tasks, Suspense accounts let you work without interruption but still protect your client by earmarking items that require further investigation.
Problem: Client A, a small retailer, sells inexpensive items with odd prices ($1.27, $1.92, $2.17). She assures you that her checkbook tells you everything you need to know: All deposits, without exception, are sales. Yet you know from experience that she always has nonsales amounts in the deposits that she has forgotten. At year end, the first thing you do is reconcile her 12 bank statements to compile revenues and expenses. In her January bank statement, you see deposits of $453.23, $938.30 . . . and $1,000. Surely, no deposit of cash and checks could amount to precisely $1,000 in sales. What should you do?
Solution: Credit suspect deposit amounts to a Suspense (rather than Revenue) account so that you can complete the bank reconciliation without interruption. When this actually occurred, the $1,000 deposit turned out to be a loan that the client had made to the store she owned. If it had been posted to a Revenue account, she would have paid tax on a loan.
For employed or freelance bookkeepers
A Suspense account is effective only when used as a temporary account. Get the missing information as soon as possible, and then close out the account.