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.