Suspense Accounts
Definition of Suspense Accounts—General Purpose
Any account which is used as a place of temporary record for items pending a determination of their final status or allocation may be called a suspense account. The definition points out the general purpose for which such accounts are opened. It frequently becomes necessary to record items on the books as soon as the transactions giving rise to them have taken place. At the time, the information needed to determine their final place of record may be lacking. Stock certificates may find their way into the secretary’s office with the name of the party to whom transferred omitted; cash may be received through the mails with the identity of the sender not disclosed; provision must be made for bad debts before it is known what accounts will prove uncollectible—these and similar items call for record before their final status is determinable.
When cash is either short or over, the Cash Short and Over account serves as a temporary adjustment account. Discrepancies between the book record and the physical inventory of cash due to various causes are temporarily thrown into this account until further information discloses the cause. When it becomes evident that such information cannot be secured, any balance is usually treated as a profit and loss item at the end of the fiscal period. Similarly, discrepancies between the bank’s cash record and that of the business may be thrown into an account called “Bank Adjustments” or some other similar title, to show the nature of the items there recorded. The Petty Cash account, between the periods of its adjustment by means of a replenishing check, is in the nature of a suspense account. Only when an analysis of the petty cash expenditures and the replenishing check are recorded on the books is Petty Cash an asset account. Failure to locate an error in the trial balance is sometimes recorded on the books through the medium of a Trial Balance Adjustment account so as not to carry the difference over into the trial balance of succeeding months. Where such an account is set up it is a suspense account pending the finding of the error.
Again, it may sometimes become necessary to adjust arbitrarily a difference between a controlling account and the total of the ledger which it controls pending the finding of the discrepancies between the two. Thus, an Accounts Receivable Control may not accord with the sum total of the customers’ accounts carried in the sales ledger, and it may be deemed advisable to accept the subsidiary ledger record as correct rather than the figures of the controlling account. The adjusting item is usually incorporated in the controlling account but is in the nature of a suspense item pending the allocation of the difference. As mentioned above, a cash receipt from an unidentified customer must be recorded in a suitably named suspense account. Similarly, unclaimed wages which have been charged on the books to the proper ledger account and credited to cash must be carried until they are called for or until their record may with reasonable certainty be closed on the books. Unclaimed dividends must also be held in suspense until such time as a definite settlement of their disposition may be determined. Advances to subsidiaries when recorded as a charge in open account against the subsidiary are frequently of the nature of suspense items. The subsidiary may settle the account by payment of cash, by payment of its bonds or stock, or the account may not be settled and it then becomes necessary to write it off as a bad debt.
Similarly, purchase invoices and other like items in dispute may be booked as suspense items under suitable titles. However, in cases of this kind it is more usual to hold the invoices until some basis of settlement is reached before recording them on the books. If the fiscal period closes with these items still unsettled, it will be necessary to bring them on the books as contingent liabilities.
The Reserve for Depreciation may be looked upon as a suspense account. The credit entries therein which serve the several purposes explained elsewhere, are in the nature of items belonging to asset accounts which are held in suspense pending the final disposal of all or some part of the asset. This final disposition may take place either because of sale, loss by fire, or the discard of the asset on account of complete depreciation. At such a time it becomes necessary to transfer the portion of the reserve belonging to the asset finally disposed of as a credit to the asset account in order to clear that account of the asset values therein shown.
Reserve for Doubtful Accounts as a Suspense Account
In like manner the Reserve for Doubtful Accounts is a suspense account because at the close of the fiscal period it becomes necessary to make an estimate of the probable amount of uncollectible items in order to appraise correctly the value of outstanding claims against customers. This estimate must be carried as a credit in the Reserve for Doubtful Accounts because at that time it is not known definitely to what particular customers’ accounts it applies. During the following periods, as the information becomes definite as to what accounts are absolutely uncollectible, the credit held temporarily in the reserve account is transferred to the particular customer’s account which has proved uncollectible. Thus, we often speak of charging an uncollectible customer’s account against the reserve, which is another way of saying that we transfer from the reserve a portion of the credit held there in suspense, to the customer’s account after it has been determined to what customer’s account it belongs.
Use of Suspense Ledger
In an effort to keep closer track of doubtful accounts and notes receivable, such accounts are frequently transferred to what is known as a suspense ledger. A fundamental misunderstanding seems to exist with regard to the meaning of such a transfer. A business man often points with pride to the fact that he has transferred a number of items from his regular customers ledger to a suspense ledger, implying thereby a policy of conservatism in the value at which he carries his customers’ accounts on his books. As a matter of fact, the transfer to the suspense ledger in no sense changes the valuation at which the accounts are carried on the books. Separation of the doubtful items from those considered good provides a convenient basis for analysis according to which, at the end of the fiscal period, it will be possible to make a much more accurate and intelligent estimate of the probable loss from uncollectible items. Aside from that and another fact of importance, namely, that by keeping all such accounts in a suspense ledger it becomes much easier to watch them closely, nothing is to be gained by the use of a suspense ledger. As to the proper method of handling this ledger, it is best to carry in conjunction with it a separate control on the general ledger supplementary to the customers ledger controlling account. This would be effected at the time of removing an individual account to the suspense ledger, by transferring the same item from the customers ledger controlling account to the suspense ledger controlling account.
The form of the suspense ledger is somewhat different from that of the regular ledger in that provision is made for gathering information as to the efforts made to collect the items and the result of those efforts. A loose-leaf or card ledger serves the purpose best. While the form is not standardized, such information as the report of the mercantile agency at the time of granting the original credit; the agent in whose hands the account is placed for collection; the date of placing the claim in his hands; his report on his efforts to collect the account; the lawyer to whom the account is given in case suit is brought; the attorney’s report; the name and address of the trustee or receiver in case the customer has gone into bankruptcy; the date of filing a claim with the trustee; the judgment secured; the particulars as to settlement; and provision for additional remarks—all this information is of value and provision should be made to record it. It may also be sometimes desirable to make use of a suspense journal where information in addition to that for which provision has been made on the ledger account can be collated and kept for reference.
Accounts Receivable Hypothecated
In connection with the handling of accounts receivable it may be well to draw attention to the growing practice of discounting open accounts receivable in much the same way in which notes receivable are discounted. In recent years a group of non-professional bankers have initiated this kind of financing. It may sometimes happen that a merchant exhausts his credit with his regular banker and is unable to raise further necessary funds in the usual way. By applying to the so-called commercial credit companies or these non-professional bankers it is frequently possible for him to discount his new accounts as he creates them through current sales to customers and so secure funds for tiding him over a temporary stringency. The practice, however, is looked upon in business and regular banking circles as evidence of the financial instability of the merchant and his probable bankruptcy in the near future. The cost of raising funds in this way is almost prohibitive excepting in cases of dire need and it is not resorted to by business houses whose financial condition is sound.
The practice works out somewhat as follows. A merchant desiring to discount his accounts turns over to the credit company with whom he has made the arrangement, the invoices of all accounts to be discounted as evidence of the sales just made to customers. The credit company on the strength of these invoices advances anywhere from 70% to 80% of their face value, thus maintaining a margin of safety of from 20% to 30%. The charge made is called commission rather than interest, and varies from 2% to 5%. To protect the credit company, frequently such invoices, as they go out to customers, bear a notation to the effect that payment of the bill is to be made to the credit company and not to the merchant selling the goods. An obvious and serious objection to this practice is that it gives the customer information as to the method of financing to which the seller has been reduced. In view of this objection a few bankers are willing for payment to be made as usual to the merchant, who must in turn transfer the identical item or the merchant’s own check for an equivalent amount to the banker. A periodical settlement with the banker secures from him a statement and return of the moneys held by way of margin. The accounts as settled are paid in full to the banker who has previously furnished, say, 70% of their face value in cash to the merchant. The banker thus holds 30% more money than he has furnished to the merchant, and as these margins accumulate it may sometimes happen that the banker is loaning the merchant the latter’s own money. Consequently, it becomes imperative for the merchant to keep careful record of all accounts discounted with, and of their payment to, the banker so that he can protect himself by requiring a settlement as may be shown necessary.
Accounting for Accounts Receivable Discounted
The accounting procedure in keeping track of these items is very similar to that for notes receivable discounted. Inasmuch as the practice does not involve an outright sale of the accounts to the banker, a contingent liability is created in case the customer does not pay his account, which the merchant will have to make good to the banker just as in the case of notes receivable unpaid at maturity. The bookkeeping record of discounted accounts may be considered under four aspects:
1. At the time of discount.
2. At the time of the banker’s report of customers’ payments.
3. At the time an account is charged back by the banker because of inability to collect.
4. At the time of final settlement with the bankers.
1. At the time a group of accounts is discounted the charges are to Cash for the amount of cash received, to Commissions Paid on Discounted Accounts for the amount of commission, and a charge to the Bankers or to a Bankers’ Margin account for the margin. The credit offsetting these debits is to an account called Customers’ Accounts Discounted. No further entry is necessary until the banker’s report of customers’ payments.
2. At the time an account is reported as paid by the banker, the contingent liability thereon as carried in the Customers’ Accounts Discounted account has ceased to exist and a reversing entry becomes necessary, Customers’ Accounts Discounted is charged, and the customer’s account is credited.
3. When an account is not collected and is charged back by the banker, the contingent liability as carried under Customers’ Accounts Discounted becomes a real liability which has to be settled by payment to the banker of the amount of the cash originally advanced by him at the time of discount. At such a time the entry made will be a debit to Customers’ Accounts Discounted offset by credits to Cash and to Bankers or Bankers’ Margin account, as the case may be.
4. At the time of final settlement with the bankers, all that remains to be done is for them to pay over the balance of cash in their hands belonging to the merchant. This balance of cash is reflected by the amount of margins which they have demanded at the time of discount. Hence, on the merchant’s books the transaction will be recorded as a debit to Cash and a credit to Bankers or Bankers’ Margin account.
In order to keep close track of all accounts under discount it is advisable and almost necessary to make use of what may be termed a “discounted accounts register.” Every account, as discounted, should be given a number and entered in numerical sequence in the register. As an account is paid by the customer and reported by the banker it should be there shown as paid. The banker at the time of final settlement must render an accounting for all the accounts not shown as canceled by the register, either in cash or by a return of the claim against the customer.