A Suspense Account in Bangladesh: What Is It? Examples, Types, and How It Operates
Depending on the context, “suspense account” might mean a number of various things. A suspense account is a component of a company’s financial accounts that, in the business sector, is used to record confusing entries that require additional examination to determine their right classification.
In mortgage servicing, if a borrower has only made a portion of the required payment for that month, the servicer may utilize a suspense account to temporarily park funds. A suspense account is a kind of brokerage account used for investing in which the money received from the sale of an investment may be tracked until the customer decides to make another investment with the proceeds.
One bookkeeping instrument that has multiple uses in various corporate contexts is the suspense account.
When something is unclear and needs to be clarified before being assigned to the correct account, a business might record it on its records using a suspense account.
When a borrower makes partial monthly payments or misses payments altogether, mortgage servicers may utilize a suspense account.
Brokerage businesses utilize suspense accounts to store client funds until they are ready to be reinvested in investments.
Suspense accounts are always meant to be transient.
Banks constantly take on credit risk when they lend money to customers; this is the possibility that the borrower won’t be able to repay the loan. The loan is termed to become non-performing at that point. When a borrower misses a payment by 90 days or the bank determines that the borrower is unlikely to repay the loan, the debt is considered non-performing.
Banks’ viability is impacted by non-performing loans (NPLs), which lower their profits and result in losses. Banks are unable to lend to individuals and businesses if they have a high percentage of non-performing loans. The overall economy is harmed by this.
Utilizing loss prevention strategies: provisions and coverage
All banks have to brace themselves for loan losses. The bank projects the projected loss on the loan in the future and records a matching provision to counteract this credit risk. By booking a provision, the bank acknowledges a loss on the loan in advance. By filing a provision, a bank incurs a loss and, as a result, lowers its capital by the amount of money it would not be able to collect from the customer. Banks utilize their capital to absorb these losses.
Because they may still receive some repayments from the customer, banks are exempt from having to book provisions for the entire amount of a non-performing loan. By selling the assets or property the client has pledged as collateral, they may also be able to recoup a portion of the loan balance. The estimated net loss should be the only amount insured. The bank’s non-performing loan coverage is the amount of non-performing loans that are covered by provisions. It demonstrates the extent to which the bank has already recorded the losses associated with non-performing loans.
Business Suspense Accounts
In a general ledger, entries containing ambiguities or discrepancies that require resolution are usually found in suspense accounts. For instance, if a business’s customer pays but miswrites their account number, the funds can be held in a suspense account until the mistake is fixed and the payment is appropriately credited. In a different situation, a client may send money, but they may not have mentioned which of the many unpaid bills they meant to settle with that money.
Suspense accounts, no matter what the problems are, are closed as soon as they are resolved, and the money is immediately transferred back into the right accounts. The suspense account need to reach a balance of $1,000 at that point. Although there’s no set schedule for carrying out a clearing-out process, many companies aim to do this on a monthly or quarterly basis.
In this instance, “suspense” refers just to the fact that a transaction or its classification in a company’s accounts has been temporarily suspended, pending some further action, despite its enigmatic overtones.
Suspense Accounts for Mortgages
When a borrower accidentally misses a monthly loan payment, a suspense account can be used by a mortgage servicer to keep funds.1.
Sometimes a borrower will purposefully make partial payments, splitting their monthly payment into two sections, for example. Mortgage servicers in these situations may retain the first partial payment until they receive the second installment by using a suspense account.
The mortgage servicer will pay the lender’s interest and principal for that month as well as any escrow account that has been established to cover property tax or homeowners insurance payments, after they have received sufficient funds to make a full payment.
Similarly, the servicer may temporarily place excess funds into a suspense account if a borrower makes a payment that exceeds their outstanding balance in a given month without specifying how those monies should be used.
For instance, all payments made into a suspense account and the total amount in that account must be disclosed in the periodic account statements that servicers are accountable for sending to borrowers. Additionally, the borrower must be informed by the servicer of the necessary steps to have the funds applied to their mortgage payment.
Accounts Suspended in Brokerage
Brokerage suspense accounts briefly store money while transactions are finalized, just like the other kinds. For instance, the $1,000 from the sale of a group of stocks valued at $1,000 would be placed in a suspense account until it could be applied to the new purchase if the investor intended to promptly invest the proceeds in a different set of assets. If more information is required to complete the transaction or if there are other issues that need to be resolved, a suspense account may also be created.
We refer to the amount of money in the suspense account as the “suspense balance.”
A General Ledger: What Is It?
A company keeps continuous records of its assets and obligations, divided into many categories or accounts, in a general ledger. Assets and liabilities that need more explanation before they can be given a permanent spot in the ledger are placed in suspense accounts.
What Distinguishes a Clearing Account from a Suspense Account?
Transactions are recorded temporarily until they may be permanently assigned to suspense accounts or clearing accounts. However, suspense accounts are more frequently utilized when a transaction involves a question that needs to be answered.
Do Interest-Bearing Mortgage Suspense Accounts Exist?
No, the borrower does not receive interest on the funds in a mortgage suspense account, in contrast to mortgage escrow accounts.1.
In essence, a suspense account is a bookkeeping method used to track money for a short while until specific problems are fixed. Suspense accounts allow businesses to track payments they receive, but they can’t be fully reconciled until some details are filled in (like an invoice number). It is a method used by mortgage servicers to document partial monthly payments until the borrower completes the payment. Suspense accounts are also used by brokerage firms to track a customer’s funds, for example, between the time they sell an investment and the time they reinvest it.