Suspense accounts feature commonly in accounting records in business sectors. They also feature in the insurance industry. These accounts provide temporary storage for transactions that require further investigation or clarification.
Once the funds are classified, they go into a permanent ledger. Insurance agencies need to use suspense accounts to manage their financial status. Suspense accounts also ensure that an agency’s financial statements check out.
What Is a Suspense Account?
When an agency cannot immediately classify funds, it transfers them to a suspense account. Agencies also use this account to store funds that cannot be assigned to another account or policy for various reasons. Suspense accounts come into play when the agency has unresolved or incomplete information to work with. They act as a neutral party while the agency gathers the necessary details. Only then can the agency distribute the money.
Agencies use suspense accounts for the following:
- Unidentified payments: When an agency receives a payment missing the proper identification like an invoice number or customer information, it is placed in a suspense account until staff can obtain the correct details.
- Disputed claims: If a policyholder or insurance company disputes a claim, the associated funds are held in a suspense account until they agree on a resolution.
- Unallocated premiums: Sometimes, agencies receive premiums in advance for unissued policies. Or they receive premiums outside of their billing cycle. In these instances, the agency will leave the money in a suspense account until they can allocate it correctly.
Why are Suspense Accounts Important in Insurance Agencies?
Agencies cannot do without suspense accounts for many reasons. In addition to keeping an agency’s financial statements accurate, they help prevent incorrect payment classification. When transactions with incomplete information are wrongly classified, it leads to errors in the overall financial statements.
Suspense accounts also help streamline an agency’s accounting process. By providing a secure holding place for funds, these accounts allow staff to focus on other tasks like claims processing and policy issuance.
Moreover, suspense accounts can prevent fraud. They track unapplied cash receipts and payments, which helps identify potentially fraudulent activity.
Types of Suspense Accounts Used in Insurance Agencies
There are different types of suspense accounts for agencies to use. Each of these has its own specific purpose. Some of the most common suspense accounts include:
- Unclassified receipts: This suspense account is issued to hold funds received by an agency but not yet assigned to a specific policy or account.
- Unclassified disbursements: Agencies use this account to store funds they disbursed but have not yet assigned to a policy or account.
- Premiums in suspense: This option holds premiums collected but not earned. Earned premiums refer to money earned by the agency when the policy is active.
- Losses in suspense: This suspense account holds unadjusted losses reported to the agency. Adjusted losses must be investigated and proven to be covered by the policy.
- Deposits in suspense: Agencies use this type of account to store deposits from policyholders or other parties. Deposits happen for many reasons, including securing a policy, paying a premium, and making a claim.
- Remittance in suspense: Lastly, the remittance in suspense account stores funds remitted to an agency by other parties. Remittances typically refer to premiums, claims, and refund deposits.
Again, suspense accounts must form part of any agency’s daily operations to ensure that each transaction is recorded and accounted for. This is the best way to avoid errors and omissions in financial records that may lead to further challenges.
How To Use Suspense Accounts
Insurance agencies use suspense accounts for a short period only. When a transaction is classified, the money must move to the correct account. Any agency must follow set accounting procedures to use suspense accounts appropriately. These procedures include:
- Identifying all transactions: Agencies should identify all transactions that need further investigation or clarification. This process is usually done by reviewing financial records and tracing transactions with missing information or unclear transactions.
- Creating the suspense account: Once the agency has identified all transactions, they must transfer them to the relevant suspense accounts. Staff should create a name for each suspense account to indicate the transactions it holds.
- Recording transactions: Account staff must also record every transaction in the relevant suspense account. The debit or credit amount must also be equal to the transactional amount.
- Investigating transactions: After recording transactions, accounting staff should scrutinize them to determine the correct permanent account. Doing this may involve contacting customers or vendors, reviewing additional documentation, and consulting with other departments in the agency.
- Classifying transactions: Once staff have determined the correct accounts for all transactions, they must transfer the funds from the suspense accounts to the permanent accounts.
- Reconciling the suspense accounts: At the end of each accounting period, accounting staff must reconcile all suspense accounts to ensure the proper classification of each transaction.
Ensuring Accuracy and Efficiency with Suspense Accounts
Suspense accounts allow agencies to structure their approach to different transactions. By using suspense accounts effectively, agencies can maintain the integrity of their financial records and enhance their overall efficiency.