The accounting information you need to know can be challenging if you aren’t an accountant. But hold on tight because there’s one more instrument you’ll need to learn about: clearing accounts. This article will give you information about clearing accounts. What are clearing accounts? When and how to use them?
The Nature of Clearing Accounts
A clearing account is a temporary account that holds funds or payments while waiting to transfer them to another account. The clearing accounts are also known as the wash accounts or cash clearing accounts. In most cases, you open a clearing account because you cannot classify funds instantly and must wait for additional information. Let us look at different classes of clearing accounts and how and when a business or individual can utilize them.
Clearing account categories
Asset Clearing Account
For accounts receivables, such as receiving payment without an invoice, businesses utilize an asset clearing account. Alternatively, you can use an asset clearing account to make partial payments toward a single invoice until the invoice has a zero balance.
Liability Clearing Account
Companies use liability clearing accounts to hold funds that need to move to another account. Utilizing these accounts for activities such as paying an invoice while you wait for the exact invoice to arrive or saving money for a bill delivered in whole at the end of the project.
Both the asset and liability clearing accounts let you keep track of any items or services you’ve provided but have yet to collect payment. A cleaning account displays all funds in a state of uncertainty rather than showing cash coming in or going out.
Apart from the above two clearing accounts, the payroll clearing account is the most common to pay off the company’s salary expense. You can set up payroll clearing accounts in two ways: payroll clearing accounts in your general ledger and payroll clearing account in your bank.
Payroll clearing accounts work similarly to liability clearing accounts in your general ledger. Clearing bank accounts are kept distinct from your standard account.
How and when are clearing accounts used?
Let us have a look at the working nature of asset clearing account
You work on two projects with Company A and provide two separate invoices to them for the job you did. So, you’ve got Invoice 1 and Invoice 2 on your hands. The first invoice is for $2,000, while the second invoice is for $3,000. However, Company A only sent a $1,000 partial payment and did not include the invoice.
Create an asset clearance account in your general ledger to record the payment because you received a partial payment without an invoice. Then, call Company A and request the payment’s relevant invoice number. After you’ve double-checked the information, make a journal entry to transfer the funds to the correct account and invoice.
Now let us look at an example to understand the working nature of a liability clearing account.
Liability clearing accounts hold funds you owe and are waiting to transfer to another account. Consider the following example of a liability clearing account.
Let’s imagine you need to renovate your shop and decide to hire Company B for $10,000. You set up a clearing account for the invoice, which you’ll receive once Company B has finished the job. You transfer funds to the clearing account while Company B works on the project. You have $10,000 in your account, waiting for the invoice at the end of the project.
When the invoice arrives, you transfer the monies from the clearing account to the invoice’s more particular general ledger account.
Now let see how the payroll clearing accounts works
A payroll clearing account is a zero-balance account used to record and track payroll. After all of the checks have cleared, the account will have a balance of zero. In this instance, the account is usually a bank account used to keep funds for a short time.
A payroll clearing account increases security. A separate payroll bank account, on the other hand, makes it easier to reconcile and evaluate your books.
Let’s imagine your payroll totals $10,000, including all employees’ paychecks and the applicable taxes. So, before you pay your employees and deposit the taxes, you deposit $10,000 into the payroll clearing account. The amount in the payroll clearing account is $0.00 after your employees deposit their paychecks and you remit the taxes.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.