A clearing account, also known as a suspense account, is a temporary holding account used in accounting to record transactions that await final classification. These transactions will stay in the clearing account until they can be reviewed, verified, and appropriately assigned to the proper accounts.
Definition and Purpose
A Clearing Account is a type of ledger account used to temporarily hold financial transactions until they can be properly attributed to the correct account or ledger entry. This ensures that the final accounts are accurate and that there is a clear audit trail.
Characteristics of Clearing Accounts
Temporary Nature
Clearing accounts are inherently temporary and are designed to hold transactions for a short period. The goal is to clear these transactions to their proper accounts as quickly as possible.
Balancing Element
These accounts often balance themselves out over time. For instance, an entry in the clearing account will usually have a corresponding entry that will zero out the balance once the transaction is completed and analyzed.
Common Types of Clearing Accounts
Payroll Clearing Account
Used by businesses to temporarily hold payroll funds before they are distributed to employees. It helps in checking and verifying payroll amounts before making final allocations.
Accounts Receivable Clearing
Used to hold customer payments temporarily until they are posted to the appropriate receivable account. It helps in managing and reconciling customer payments efficiently.
General Ledger Clearing
Used to temporarily hold transactions until they can be reconciled and transferred to the appropriate accounts on the general ledger, ensuring accuracy in financial reporting.
Special Considerations
Reconciliation Process
To ensure accuracy, clearing accounts should be reconciled regularly. This involves reviewing all transactions in the clearing account to ensure they have been moved to their final, correct accounts.
Error Identification
Clearing accounts help in identifying and correcting errors. If discrepancies arise, they can be caught and addressed before the transactions affect other accounts.
Examples
Example 1: Payroll Clearing
- On payday, a company transfers $100,000 to the payroll clearing account from their main operating account.
- Payments are then made to employees’ bank accounts totaling $98,000.
- After verifying and clearing any payroll disputes or discrepancies, the company moves the remaining $2,000 back to the main operating account.
Example 2: Accounts Receivable Clearing
- A customer payment of $1,500 is received and credited to the accounts receivable clearing account.
- The payment is then checked against outstanding invoices.
- Once verified, the amount is posted to the appropriate customer’s receivable account.
Historical Context
Clearing accounts have been in use since the inception of systematic bookkeeping. They became particularly prominent with the advent of computerized accounting systems, which enable more intricate and efficient management of temporary transactions.
Applicability in Modern Finance
Clearing accounts are crucial in modern financial systems for managing large volumes of transactions efficiently. They are commonly used in banking, corporate finance, and accounting systems to enhance transparency and accuracy.
Comparisons and Related Terms
Suspense Account
A suspense account is similar to a clearing account but is specifically used when there is uncertainty about how to classify a financial transaction.
Temporary Account
A broader term that includes any account used for intermediary purposes before finalizing the transaction to the proper account.
FAQs
What happens if transactions remain in a clearing account?
Can clearing accounts have a negative balance?
How often should clearing accounts be reconciled?
References
- Hamilton, R. (2019). Accounting Principles. New York: Academic Press.
- Financial Accounting Standards Board (FASB) guidelines.
Summary
A clearing account, or suspense account, serves as a temporary repository for financial transactions until they can be adequately assigned to their correct accounts. They play a critical role in ensuring the accuracy and efficiency of financial record-keeping and help in the identification and rectification of errors.
By temporarily holding transactions, clearing accounts ensure that financial statements reflect true and accurate information, maintaining the integrity of financial reporting processes.
