Clearing AccountsDefinition, Types, Uses, and Best Practices

Denise Elizabeth P
Senior Financial Editor & Contributor
Last Updated: March 7, 2022
Date Published: November 16, 2021

What is a Clearing Account?

Clearing Accounts are a type of holding or temporary general ledger account.

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.

Often, a clearing account is opened in order to help businesses better classify their accounts.

An important consideration about clearing accounts is that they are general ledger accounts and not Trial Balance accounts therefore, they must not be added to the Balance Sheet and form part of the Financial Reports.

Not to be confused with a Suspense Account which is also a temporary account, there are defined differences between the Clearing Account and Suspense Account and the most important difference is the purpose.

A Suspense Account is used when there is a discrepancy in the books while a Clearing Account is to be used for accounts to be transferred later on to their correct accounts.

Other terms used for Clearing Accounts are Wash Account, Holding Account and Zero-Balance Account.

what is a clearing account

What is a Suspense Account?

In accounting, a Suspense Account is very helpful when it comes to reconciliations and reporting discrepancies in the credit and debit balances.

When unsure where to classify entries, they can temporarily be recorded in the Suspense Account until the accountant has determined where it has to be recorded and closed.

What is the Purpose of a Clearing Account?

A Clearing Account is used by companies for a variety of reasons and depending on the use, they can be classified as either an Asset Clearing Account, Liability Clearing Account or a Payroll Clearing Account.

Even though its use depends on what type of clearing account it is, they have one thing in common: the purpose of a clearing account is to allow businesses to set aside various payment details before recording them in their final accounts so that companies that have high transaction volumes will be able to properly classify them and record them correctly.

Common Types of Clearing Accounts

There are three common types of Clearing Accounts: Asset Clearing Account, Liability Clearing Account and Payroll Clearing Account.

Asset Clearing Account

For receivables, an Asset Clearing Account is used especially for payment receipts that do not have an attached invoice or are partially paid.

For businesses that have high sales volumes, receipts for different modes of payment will also be high.

Difficulty in tracing payments is inevitable.

Example of Asset Clearing Account

Suppose Company ABC provides services to three companies: Company X, Company Y and Company Z for $1,500 each.

They were each invoiced at the end of the day when the service was complete.

A few days after, a payment for $1,500 was received from Company Y but there was no invoice attached along with the payment.

The accountant will create an asset clearing account in order to record the payment in the general ledger and once Company Y sends the invoice details against the payment made, it can now be correctly entered in the appropriate account and removed from the clearing account.

Liability Clearing Account

A Liability Clearing Account is used for payments that you will not be making yet will have to in the future.

For payments that are sure to arrive but lack supporting documents like an invoice, the amount is transferred to the clearing account first until valid supporting documents are received to complete the payment.

Example of Liability Clearing Account

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.

This helps them have a better control of their cash flow and avoid any payment problems in the long run.

For example, TUV Company has contracted a job for the expansion of their office.

The total job will cost $20,000 and payment terms are 50% at the start of the project and remaining 50% on project completion.

TUV Company has received the initial invoice for 50% and has made the payment and the balance would be payable after 3 months on project completion.

Prior to the receipt of the final invoice and job completion, a liability clearing account is created for $10,000.

When the job is completed and TUV Company receives the final invoice, the amount will be transferred from the clearing account to the correct account.

Payroll Clearing Account

Similar to the Liability Clearing Account, a Payroll Clearing Account acts the same way – it is set aside for payment.

The only difference is that a payroll clearing account is set aside specifically for the payment of salaries and other employee benefits.

There are two examples of Payroll Clearing Accounts:

  • Payroll Clearing Account in the General Ledger
  • Payroll Clearing Account in the Bank

Example of Payroll Clearing Account

When companies issue salaries to their employees through checks, they usually set up a temporary account to record all the checks issued.

When the salaries are due, these checks are cleared from the payroll clearing account one by one.

Through this, it makes it easy for businesses to track which checks have already been cleared and which ones are not yet cleared.

Keeping the payroll in a separate account also allows companies to have a better idea of their cash flow since salaries typically take up the bigger portion of cash outflows.

Clearing Accounts

Who Should Use Clearing Accounts?

Clearing Accounts makes the most sense for companies who deal with a lot of cash inflows and cash outflows.

With the bulk of receipts and payments, tracking them can be difficult especially if client payments are received without any invoice details.

In the same way, when there are a lot of employees, the payroll might be harder to track especially if there are still employees paid by checks.

When transactions are high for receipts, payments and payroll, it is always better for companies to keep a separate clearing account for all three to post the transactions correctly to their accounts.

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  1. UC Davis "Best Practices for Clearing, Default and Suspense Accounts" Page 1 . November 16, 2021

  2. Indiana University "Clearing Accounts" Page 1 . November 16, 2021

  3. Stanford University " How to Clear Billable Charges from a Default Clearing Account" Page 1 . November 16, 2021