What are Clearing Accounts?
A clearing account, in short, is an account that is used as a temporary location to keep money before transferring it to another account. A business owner might be getting rid of his business accounts by the end of the year. To move the finances into a new account, they must have a safe place to keep all the money before making the big move. For this purpose, clearing accounts are helpful. It serves as a temporary place to store your monetary funds before you are ready to shift them into a new account for a fresh start.
Clearing accounts serve as a temporary location to keep your money for a short amount of time. During this time, business owners may be waiting on some financial data to deduce the performance of their business during that year. Some business owners may also use this time to prepare Balance sheets and other financial statements.
Now, consider two things when one uses a clearing account. The first point is that the financial health highlighted in the clearing account is not in use in the balance sheets.
The second point to ponder is that a clearing account is not synonymous with a suspense account. Both are two entirely different things and are not to be confused with one another.
Difference Between a Clearing and a Suspense Account
As explained, clearing accounts’ primary use is to store monetary funds for a company as the accounting year concludes. A business owner may be waiting to process some data before shifting the amount to a new account. For this purpose, they would make use of a clearing account. They would store all their money for a short period as they waited for their new account to become active.
On the contrary, a suspense account also stores your money for you but only caters to the difference not covered by the debit and credit, meaning that it holds the trial balance in this account. On the other hand, a clearing balance keeps all the finances in a ledger without a difference.
Why Do You Need a Clearing Account?
Clearing accounts generally have three uses.
The first use would be as explained above. A business owner uses a clearing account when they are waiting for specific financial data before transferring it into a new account. Once they can retrieve the required data, the business owner would empty the clearing account by transferring the funds to the new account.
The second use would be utilizing a clearing account as an asset clearing account. An asset clearing account is needed when a business owner is waiting for an incoming payment. Once the invoice amount is received, the business owner can empty the clearing account.
Businesses use payroll clearing accounts to clear out payrolls. Payrolls clear from the bank as well as a ledger.
If you have learned a thing or two by reading this article, you will now know the importance of using a clearing account. A clearing account should always be discreet and could aid the business owner in their financial maintenance.
It is essential to note the difference between a clearing account and a suspense account. A business owner must understand the kind of account they need for a short period while figuring out their financial situation.
You do not have to be an accountant to know how to use a clearing account. You should be aware of your financial data. Using a clearing account would assist you in maintaining a presence in the market as you would be able to keep your finances clear.
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