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.
- 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.
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
- 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., 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.
- 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?
- The clearing account is a general ledgerGeneral LedgerA general ledger is a book of accounts that records the everyday business transactions in separate ledger accounts. The entries made in a ledger can be verified by getting a NIL balance on summing up all the ledger account amounts in the trial balance., which in many ways, helps the clients to set aside their money, which they opt to invest in certain transactions, but the payment of the same has to be in hold. The account typically transfers the required amount in the desired account as per the client’s opinion.
- Now basically, 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.. It’s created to just 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.. These transactions are recorded in the balance sheet under relevant heads or forms after the money from that account gets disbursed. 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.
- Clearing account helps to set aside the money or funds for the following action, which the client will take in the business and then transfers the required amount in the necessary account as per the opinion of the client. On the other hand, the 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. is used when there is a problem in the posting of the accounts. After the problem resolves, the amount is transferred to the required account.
- In suspense account, the transactions are held because of some problem, whereas in case of 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 case of suspense account.
- The suspense account is shown in 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. 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.
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 –