A clearing account is a temporary account that is used to hold funds temporarily until they are transferred to another account. It is also known as a buffer account or a liability clearing account. A clearing account helps to keep track of money that cannot move directly from one account to another.

What is a Clearing Account, and What is it Used for?

Definition of Clearing Account

A clearing account is a type of account used to facilitate the transfer of funds from one account to another when you cannot move the money directly. It allows you to hold funds temporarily until you are ready to transfer them to another account. Accountants and bookkeepers often use it to help manage and reconcile different types of accounts. To learn more, you can read this article.

Why Do You Need a Clearing Account?

You may need a clearing account when you are trying to transfer money from one account to another, but you cannot move the money directly. For example, if you use PayPal or Shopify to process payments, you may need to use a clearing account to hold funds temporarily until they are transferred to your bank account.

Types of Transactions That Use a Clearing Account

There are several types of transactions that use a clearing account, including payroll, customer transactions, and supplier transactions. When you pay employees like your bookkeeper or accountant, the money is transferred to a payroll clearing account until it is transferred to their bank accounts. When a customer pays an invoice, the money is transferred to an invoice clearing account until it is transferred to your bank account. When you pay a supplier, the money is transferred to a supplier clearing account until it is transferred to their bank account.

How to Set Up a Clearing Account in QuickBooks?

Creating a New Clearing Account

To create a new clearing account in QuickBooks, you will need to go to the Chart of Accounts and click on the New Account button. From there, you can select the type of account you want to create and give it a name. You can also set up the opening balance for the account if necessary.

Linking Accounts to Clearing Account

Once you have created the clearing account, you will need to link it to the other accounts that you are using. To do this, you will need to go to the Chart of Accounts and select the account you want to link. From there, you can select the clearing account from the drop-down menu.

Posting Transactions to Clearing Account

To post transactions to the clearing account, you will need to select the account you want to transfer money from and the clearing account as the account you want to transfer the money to. Once you have done this, the money will be transferred to the clearing account until you are ready to transfer it to another account.

How Do You Use a Clearing Account in Payroll?

Using Clearing Account to Record Employee Payroll

When you pay your employees, you can use a payroll clearing account to record the payment. This allows you to keep track of the money that has been paid to your employees until it is transferred to their bank accounts.

Transferring Funds from Clearing Account to Payroll Account

Once you have recorded the payment in the payroll clearing account, you can transfer the money to your employee's bank accounts. To do this, you will need to select the employee and the payroll clearing account from the drop-down menus. From there, you can enter the amount you want to transfer and the date you want to transfer it.

Using Clearing Account for Employee Deductions

You can also use a clearing account to record employee deductions, such as taxes or benefits. This allows you to keep track of the money that has been deducted from your employee's paychecks until it is transferred to the appropriate accounts.

What is a Suspense Account and How Does it Relate to Clearing Account?

Definition of Suspense Account

A suspense account is a type of account used to hold transactions that cannot be posted to another account. It is also known as a suspense clearing account or a reconciliation account. Read this article to learn more.

Using Clearing Account to Clear Suspense Account

You can use a clearing account to clear transactions from the suspense account. To do this, you will need to select the suspense account as the account you want to transfer money from and the clearing account as the account you want to transfer the money to. Once you have done this, the money will be transferred to the clearing account, and the transaction will be cleared from the suspense account.

How to Reconcile Suspense Account Balance

To reconcile the suspense account balance, you will need to review the transactions that are in the account and make sure that each transaction has been posted to the appropriate account. Once you have done this, you can transfer any remaining funds to the appropriate account or leave them in the suspense account until you are ready to transfer them.

What are the Other Types of Clearing Accounts Used in Accounting?

Zero-Balance Account

A zero-balance account is a type of clearing account that is used to hold funds until they are needed to pay bills or invest. This account is typically used by businesses that have large cash balances but do not want to keep the funds in a regular checking account.

Wash Account

A wash account is a type of clearing account that is used to offset debits and credits between two accounts. It is often used to reconcile accounts that have a lot of transactions or that are difficult to reconcile in other ways.

Invoice Clearing Account

An invoice-clearing account is a type of account used to hold funds until they are received from customers. It is often used by businesses that have a lot of open invoices or that invoice customers on a regular basis.

How Does Clearing Account Affect Balance Sheet and General Ledger?

Impact of Clearing Account on Balance Sheet

When you use a clearing account, the funds held in the account will be reflected on the balance sheet as either an asset or a liability, depending on the type of account. For example, if you use a payroll clearing account, the funds held in the account will be reflected as a liability on the balance sheet until they are transferred to your employee's bank accounts.

Posting Entries to General Ledger from Clearing Account

When you transfer funds from a clearing account to another account, the transaction will be posted to the general ledger. This allows you to keep track of the movement of funds between different types of accounts.

Clearing Old Transactions from Clearing Account

It is important to regularly clear old transactions from your clearing accounts to ensure that your financial statements are accurate. This can be done by transferring the funds to the appropriate accounts or by leaving them in the clearing account until they are needed.

What are the Common Mistakes to Avoid When Using Clearing Accounts?

Posting Incorrect Entries to Clearing Account

One of the most common mistakes when using a clearing account is posting incorrect entries to the account. This can result in inaccurate financial statements and can make it difficult to reconcile accounts.

Not Reconciling Clearing Account Regularly

Another common mistake is not reconciling your clearing account regularly. This can result in transactions being posted to the wrong accounts or funds being held in the account for too long.

Using a Clearing Account as a Permanent Account

Finally, it is important to remember that a clearing account is a temporary account and should not be used as a permanent account. Funds held in a clearing account should be transferred to the appropriate accounts as soon as possible to ensure accurate financial statements.