Clearing account definition
/What is a Clearing Account in Closing the Books?
A clearing account is a general ledger account that is used to temporarily aggregate the amounts being transferred from other temporary accounts. The best example is the income summary account, to which the ending balances of all revenue and expense accounts are transferred at the end of a fiscal year before the aggregate balance is shifted to retained earnings. In this role, the income summary account is employed only as part of the year-end closing procedure.
What is a Clearing Accounting in Day-to-Day Accounting?
A clearing account may be used to hold transactions for a short period of time. This is usually done when a complex transaction arises, for which you do not have time at the moment to discern exactly where it should be recorded. Clearing accounts are useful when you only have a few senior-level accountants who can properly account for these transactions, and who need to defer the entry until they have more time available. In effect, this is a good way to deal with bottlenecks in the transaction processing work flow.
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Types of Clearing Accounts
There are several applications for clearing accounts within the typical business. Several types of clearing accounts are noted below:
Payroll clearing account. A payroll clearing account temporarily holds funds meant for employee wages, taxes, and deductions before payments are disbursed. After payroll processing, the total payroll amount is transferred into this account and then used to pay employees and remit taxes. It ensures that payroll entries in the general ledger match cash outflows. For example, $100,000 in total payroll might be transferred into the account, then paid out as $90,000 to employees and $10,000 to tax agencies.
Cash clearing account. A cash clearing account records incoming and outgoing cash transactions that are not yet fully reconciled. It acts as an intermediate holding place when receipts and disbursements have timing differences with bank postings. Once the bank confirms the transactions, entries are moved from the clearing account to the correct final accounts. For example, a deposit from a customer may first hit the cash clearing account until the bank officially processes it the next day.
Goods receipt/invoice receipt (GR/IR) clearing account. A GR/IR clearing account is used when goods are received but the supplier's invoice has not yet arrived. This allows businesses to record inventory acquisition while still waiting to recognize the accounts payable liability. Once the invoice is received and matched to the goods receipt, the clearing account is zeroed out. For example, a company receives $5,000 worth of inventory but only clears the GR/IR account when the supplier's $5,000 invoice is posted.
Intercompany clearing account. An intercompany clearing account temporarily records transactions between different legal entities within a corporate group. It helps ensure that due-to and due-from balances between companies match before they are finalized in each company's books. This facilitates consolidated financial reporting without errors from unmatched entries. For example, if Subsidiary A sells $20,000 worth of goods to Subsidiary B, both sides initially post the amount to an intercompany clearing account.
Suspense clearing account. A suspense clearing account holds transactions temporarily when there is uncertainty about where they should be posted. It helps keep the books balanced until more information is available to complete the correct entry. Once the proper account is identified, the transaction is transferred out of suspense. For example, if a payment of $500 is received without identifying details, it may sit in the suspense clearing account until the payer is confirmed.