One rogue entry into your accounting software will at best disrupt your financial reporting and at worst cost your business money.
That's why it can be helpful to keep a suspense account, which acts as a placeholder for questionable entries and discrepancies pending further analysis.
What is a suspense account?
A suspense account is an entry in your ledger where you can record transactions that can’t yet be classified. For example, a customer sends £250 to your business but doesn't provide any detail about which of your open invoices this pertains to. Until you can ascertain what the £250 is paying for, you'd park that transaction in your suspense account.
“We would recommend keeping track of suspense items within a control account in your accounting software," says Alice Pearce, Senior Client Advisor at Wilson Partners accountancy firm.
"A control account like this would typically sit within your trial balance. You would look to clear it down at the end of each accounting period you report on, be it monthly, quarterly, or annually."
Pearce stresses that the suspense account is supposed to be temporary, allowing you to continue working on accounts without losing any information. As soon as you find out what the transaction was, it must be moved from the suspense account into its correct place on the ledger.
Why is a suspense account important?
Suspense accounts can be an incredibly important tool, ensuring you don’t lose track of certain transactions or accidentally enter figures in the wrong place, which can result in errors in your financial statements.
Leah Lobek, Co-Founder of restaurant chain The London Shell Co, reveals that having a suspense account can help ease the admin burden. “There’s a lot of paperwork, from people’s mobile phone bills to supplier and utility invoices," she says.
"With so many transactions it can take time for the information to get to me and the bookkeeper. In a niche business with so many different varieties of payments, sometimes it can be [difficult] getting it all together.”
Despite this, Lobek and her bookkeeper do manage to round up any unidentified transactions and move them from suspense to the main accounts.
While a suspense account adds flexibility to updating a ledger, with an American Express® Business Gold Card you get greater flexibility on when the cash for supplier payments actually leaves your business. You get up to 54 days to clear your Card balance, so you can keep your money in the account for longer¹.
Types of suspense account
Just as with the main balance sheet, suspense accounts can broadly be divided into assets and liabilities.
The asset suspense account
If the cash came from the sale of an asset and couldn’t determine precisely which one it was, the entry would be in the asset suspense account.
The revenue suspense account
Another type of asset suspense account, the entry would be in this section if money had been received but an invoice hadn’t yet been issued.
The liability suspense account
If, for example, the cash was a down payment, either an advance for work to be done or a deposit to secure a product.
The expense suspense account
Another type of liability suspense account, if the company or employees have previously spent money and you are unsure where to attribute the cash, it would reside here.
However, all that being said, due to how suspense accounts work, it may often be hard to determine the nature of the entry accurately enough to use the categories above. In this case, you may choose to have a single suspense account entry until you figure out where the transaction should be recorded.
Suspense account examples
There is a range of scenarios where you might need to use a suspense account. Here are some examples:
Unidentified revenue
An ad agency receives a payment of £5,000 from a client. However, this client has been issued with several invoices across a broader line of business, and none correspond to this amount. For the time being, the ad agency logs the £5,000 in its suspense account pending further investigation.
Managing part-payment of invoices
A woodworking firm receives part-commission in advance to build a range of garden furniture for a client. Because this payment isn't in full, it doesn't have a direct correlation on the balance sheet as it won't match revenue, inventory or expenses. For this reason, it may be held in the suspense account. It will be moved onto the ledger once the commission has been paid in full following the completion of work.
Unaccounted-for spending
This is perhaps one of the most common issues and one that Lobek says she deals with on an almost daily basis. "We only have a few business credit cards but several people have access to them," she says. "We might have got an invoice through from a catering supplier or wholesaler but it hasn’t been passed on to me. It could have been any one of three or four people so it takes me time to go and track it down.”
Departmental budgets
The procurement department of a large warehousing company receives a bill from a software company that is accompanied by a verifiable purchase order and so issues the payment. However, the purchase order does not specify which departmental budget the cost should be allocated to. Until the procurement or accounts department can get verification from the departmental manager and the correct budget is identified, the cost sits in the suspense account.
When to use a suspense account
Again, Pearce would advise that a suspense account is a very temporary measure and it should be cleared as quickly as possible to make sure the company’s financial statements are fully correct and compliant.
Businesses with lots of transactions, particularly ones involving staff who are not financially trained, may find they need to use a suspense account more frequently. Lobek notes that now the company uses software to scan invoices, receipts and bills, it is far easier to keep track of transactions. "If my bookkeeper can’t find an invoice and I know that I’ve posted it via [my software], it’s very easy to work out where it is, rather than a whole stream of forwarding on invoices by email and finding out by process of elimination,” she says.
While the use of accounting software should be making it even easier to keep on top of your accounts, it is inevitable that one or two entries will slip through the net. Keeping an up-to-date record and regularly reviewing your suspense account will help you make sure all is well when it comes to reporting your finances.
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
