Clearing and suspense accounts are designed to hold financial transactions until they can be designated to revenue or expense accounts. These accounts need to be current and accurate since they will feed into the primary financial accounts of the company.
Clearing and suspense accounts are accounting tools designed to prevent errors. While the clearing and suspense accounts are used for a similar financial function, some key differences exist between them and how they are used.
Understanding Suspense Accounts
Suspense accounts contain entries where there were financial discrepancies and uncertainties. For instance, if an individual makes a deposit but enters an account number incorrectly, that money will be deposited into the suspense account until the error is corrected. In another scenario, a client might issue a payment but couldn’t specify which invoice they intend to pay with the funds.
Regardless of the uncertainties, suspense accounts are only used until the error or confusion is resolved. The funds are then designated to the correct business account. Banks monitor and reconcile suspense accounts regularly. Unresolved suspense items are written off when classified as uncollectible and entered as a loss in the final report.
Suspense accounts are also known as general ledgers that contain pending transactions. For instance, when a person has multiple items with outstanding payments and makes payments without mentioning them, instead of leaving the payments off the financial records, you can keep the transactions in a suspense account until you decide where they belong.
Following are the few benefits of a suspense account.
- It allows a temporary space for recording evident transactions.
- It keeps the account books organized by removing anonymous transactions.
Understanding Clearing Accounts
A clearing account is generally a temporary account containing amounts to be transferred to another account. An example is the income summary containing income and expense costs to retained earnings at the end of every fiscal period.
Clearing an account makes it easier to secure the cash until the amount is acknowledged, verified, and deposited back into your account. It can also be utilized for account receivables.
Often, amounts are transferred into the clearing accounts for security purposes and later deposited in a more suitable account. Moreover, these accounts can verify the processing income and expenditure amounts. Both amounts are recorded promptly to make the financial records as accurate as possible. Clearing accounts are valuable for situations that include,
- Funds that are not deposited in the bank account until the following year.
- Alteration of payments needs to be cleared out.
- Inaccurate amount postings need to be excluded.
- All expenditures should be paid to get zeroed out.
Clearing Account vs. Suspense Account
Temporary accounts
Clearing and suspense accounts are somewhat similar because both are temporary accounts. However, they both have entirely distinct functions. Clearing accounts are utilized to hold transactions and to ensure that information is recorded accurately. At the same time, a suspense account comes in handy for an emergency or problem. It offers to secure the cash until the issue is resolved.
Handling variability
Suspense accounts are the general ledger accounts that hold transactions when there’s a vagueness involved. However, a clearing account keeps the payments that are supposed to be transferred to another account. Securing the suspense account’s payment would be accessible until you anticipate where it belongs.
Scope variance
Clearing accounts can probably assist larger corporations because, in small businesses, there aren’t many cash transactions to separate the records. However, a suspense account works amazingly well for every stage of business. For instance, when a company can’t decide the type of account, a suspense account comes in handy to secure the transaction.
A company generates many transactions throughout its business operations. Sometimes, a cash transaction might contain missing information that gets entered into records. Specifically, a business has to record every transaction, and you’ve to choose whether you opt for a clearing or suspense account for your business purpose.
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