What is a Clearing Account?
Explanation
- It is a zero balance account in which the clients can put their money, which they want to transfer to another account. This transfer cannot be done directly, and thus this account is being introduced. It is one of the facilities provided by the bank to their customers who are doing business transactions and would like to separately deal with the funds kept aside for any business transaction to happen.Often, clients keep the money in that account, and it gets cleared monthly or sometimes daily. The big business people try to complete the transaction daily because they deal with significant transactions, and a considerable amount of money is involved, which is also required to get rotated in the accounts.The bank automatically transfers the amount to the required account as per the client’s requirement. The bank facilitates the clearing account facility and helps settle the clients’ funds. Nowadays, specific software also takes care of such account facilities, but it is always advisable to opt for the banks to do so.
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Purpose
The purpose of this account is to set aside a sum of money, which is used later in the process of transaction finalization. Later on, this amount is transferred to the required account. It helps the clients hold any payment to the third party if the party does not complete the necessary work on time.
Sometimes it has been seen that the party or any reason fails to complete the given order, and the amount is paid to them in advance, and after the failure, the waiver of the amount becomes very difficult. Therefore this type of clearing account is introduced. Mostly it has been seen that the big business people use this facility from the banks.
Examples of Clearing Account
- In many big companies with lots of employees under payrollPayrollPayroll refers to the overall compensation payable by any organization to its employees on a certain date for a specific period of services they have provided in the entity. This total net pay comprises salary, wages, bonus, commission, deduction, perquisites, and other benefits.read more, the company can use the payroll clearing account. It is a zero-balance account. 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. This account not only helps to regulate the payments but also helps to make a certain reserve for the upcoming future payments, and that money cannot be used in the business if it is kept aside in an account.Some big organizations opt for such accounts to manage their vast cash related transactions, especially the day to day business expensesBusiness ExpensesBusiness expenses are those incurred in order to successfully run, operate, and maintain a business. Travel & conveyance, salaries, rent, entertainment, telephone and internet expenses are all examples of business expenses.read more. The company owner can take advantage of the clearing account by recording the transactions in that account and keeping aside the required cash. Afterward, when he gets time and wants to accurately record and distribute the funds to the required accounts, he can do that easily. This way, he will be eased out from the hush and rush of the limited hours, and also, the chances of making mistakes will be very minimal.
How Clearing Accounts Come Under the Balance Sheet?
- The clearing account is a general ledgerGeneral LedgerA general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. 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.
- read more, which helps the clients set aside their money, which they opt to invest in certain transactions, but the payment of the same has to be on hold. The account typically transfers the required amount to the desired account as per the client’s opinion.This account is not recorded directly under any heads of the Balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more. It’s created to record the income or the expenses until transferred to the retained earnings in the balance sheetRetained Earnings In The Balance SheetRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more. These transactions are recorded in the balance sheet under relevant heads or forms after disbursing the money from that account. Therefore it is tough to correctly mention the head of the balance sheet in which the clearing account will come while finalizing the accounts for the year-end.
Difference Between Clearing Account and Suspense Account
- The functions of both accounts are different.A clearing account helps set aside the money or funds for the following action, which the client will take in the business, and then transfers the required amount to the necessary account as per the client’s opinion. On the other hand, theSuspense Account is a general ledger account that holds records of temporary transactions that which do not have sufficient evidence for double entry or appropriate vouchers. This account is settled within the accounting period and does not appear anywhere in the financial statements.read more Suspense accountSuspense AccountSuspense Account is a general ledger account that holds records of temporary transactions that which do not have sufficient evidence for double entry or appropriate vouchers. This account is settled within the accounting period and does not appear anywhere in the financial statements.read more is used when there is a problem in posting the accounts. After the problem resolves, the amount is transferred to the required account.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.The process and formalities involved in clearing accounts are straightforward, but the process and formalities and the resolved pattern are not so simple in the case of suspense accounts.The suspense account is shown on the balance sheet under assets if it has a debit balanceIt Has A Debit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction.read more and on the liability side if it has a credit balance. In contrast, the clearing account does not directly come under the balance sheet since it gets disbursed.
Conclusion
Clearing accounts can only help big organizations because, in small organizations, there are not many transactions to keep the record separately to ease at work. Small businesses can even lose interest in the savings account, which they may get if the funds are in the savings account. It can be a handy tool for big companies since it helps manage huge income and expenses of the organization with better transparency.
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This article has been a guide to the account and its definition. Here we discuss the purpose and example of clearing an account and how it comes under the balance sheet. You can learn more about accounting and financing from the following articles –
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