Clearing Account

What is a Clearing Account?

Clearing account, also known as wash account, is a kind of temporary account in which the funds are kept to get it smoothly transferred to the required account when the transfer cannot be done directly from one account to another. It helps the clients to set aside a sum of money when the transactions are in process. This may help to segregate the sum of money from the account for the particular business.

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. This 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.
  • Many a time’s clients keep the money in that account, and it gets cleared monthly or sometimes daily. The big businessmen try to complete the transaction daily because they are dealing 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 not only facilitates the clearing account facility it also helps in settlement of the funds of the clients. Nowadays, there is specific software that also takes care of such account facilities, but it is always advisable to opt for the banks to doing so.
Clearing-Account

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Source: Clearing Account (wallstreetmojo.com)

Purpose

The purpose of this account is to set aside a sum of money, which is used at the later stage in the process of transaction finalization. Later on, this amount is transferred to the required account. This helps the clients to hold any payment to the third party in case 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 seen that the big businessmen use this facility from the banks.

Examples of Clearing Account

  1. In many big companies where there are 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 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 again. 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.
  2. Some big organizations opt for such accounts to manage their vast cash related transactions, especially the day to day business expenses. The owner of the company can take advantage of the clearing account by recording the transactions in that account and keep aside the required cash. Afterward, when he gets time and wants to accurately record and distribute the funds to the required accounts, he could do that easily. This way, he will be eased out from the hush and rush of the limited hours, and also the changes making mistakes will be very minimal.

How Clearing Accounts Come Under the Balance Sheet?

Difference Between Clearing Account and Suspense Account

Conclusion

Clearing Account can only help big organizations because, in small organizations, there is not much transaction to keep the record separately to ease at work. The 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 to manage huge income as well as expenses of the organization with better transparency.

This article has been a guide to what is the account and its definition. Here we discuss purpose and example of clearing account and how it comes under balance sheet. You can learn more about accounting and financing from the following articles –