GST Clearing Accounts in Accounting: Definition & Examples Video & Lesson Transcript

clearing account definition

Temporary accounts are branched into clearing and suspense accounts. Suspense accounts are the accounts that are used to record or report doubtful transactions before verification and analysis, and it helps to handle uncertain monetary scenarios arising in a business. Clearing accounts can be defined as a record that keeps track of all the decreases or increases in the financial activities of a business throughout the fiscal year. Each of the accounts is recorded in the ledger and is used to create the financial statements of the year.

Then, contact Company A to ask for the appropriate invoice number for the payment. After you confirm the information, create a journal entry to move the funds to the correct account with the appropriate invoice. Accounting for multiple e-commerce businesses or payment providers. Synder creates a separate clearing account in your accounting system for each e-commerce business or a payment processor. For example, you can have one clearing account for Shopify payments, another one for PayPal, and a different one for Stripe transactions. This separation of money flows facilitates the bookkeeping process by helping to identify the issues and discrepancies precisely.

The purpose of a clearing account

Clearing accounts are used temporarily to record transactions until they post them to a permanent account. Clearing accounts are more simple accounts where you easily enter cash received as a clearing amount until the money is acknowledged, verified, clearing account definition and deposited in your bank. Clearing accounts can also be used in a way for accounts receivable. Clearing is the procedure by which financial trades settle; that is, the correct and timely transfer of funds to the seller and securities to the buyer.

  • Cleared funds mean you have full access to withdraw or use the available money in your bank account for transactions.
  • The account in this scenario is typically a bank account specifically used for holding funds for a temporary amount of time.
  • We can have several clearing accounts for different payment processors.
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  • And, the suspense account reports balances that do not match between your debits and credits.

A clearing account may also be used for accounts receivable until a customer’s payment arrives. Clearing is the process of reconciling purchases and sales of various options, futures, or securities, and the direct transfer of funds from one financial institution to another. The process validates the availability of the appropriate funds, records the transfer, and in the case of securities, ensures the delivery of the security to the buyer. Non-cleared trades can result in settlement risk, and, if trades do not clear, accounting errors will arise where real money can be lost. All the salaries are kept aside and transferred to this account before disbursing it to the employees. When the salaries are paid on a specific date, the account has a zero balance.

What is Zero Balance Clearing Account?

When the salaries are due, these checks are cleared from the payroll clearing account one by one. The only difference is that a payroll clearing account is set aside specifically for the payment of salaries and other employee benefits. Businesses typically set up a liability clearing account so that they could set aside the money for a payment that they have to make in the near future. We can have several clearing accounts for different payment processors.

clearing account definition

Typically, clearing accounts contain amounts that are to be transferred to another account later. For example, an account with revenue and expense amounts that are to be transferred to retained earnings at the close of a fiscal period. The GST, or General Sales Tax, is a 10% tax that businesses must pay for goods and services sold.

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The amounts recorded in the clearing accounts are held there for a daily or monthly basis until they are transferred to the accounts where they belong. In the suspense account, the transactions are held because of some problem, whereas in the case of a clearing account, the fund is transferred temporarily until the client asks to transfer it. Payroll clearing accounts in your general ledger act similarly to liability clearing accounts.

The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations. A clearing account is a general ledger account that is used to temporarily aggregate the amounts being transferred from other temporary accounts. In this role, the income summary account is employed only as part of the year-end closing procedure. When you use accounting systems, like QuickBooks or Xero, a clearing account there is a buffer account created in the Chart of Accounts section. It temporarily holds the records of transactions synced into the system, for example, from an e-commerce platform, a payment processor or like is does opening balance equity.

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Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Unauthorized use and / or duplication of this material without express and written permission from this site’s owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to What a Figure!

How does a clearing account work?

A Clearing Account is an account that you use to move money from one account to another account when you cannot move the money directly. This account normally has a balance of $0.00 because you always take out the same amount that you put in. It may also be called a Barter or Wash Account.

What is clearing account in accounts payable?

The accounts payable team uses this account to hold funds necessary for paying incoming invoices. Liability clearing accounts can hold these funds before receiving the invoices or processing payment. Some businesses use this account to keep partial savings toward an upcoming lump sum payment for a bill or big purchase.

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