Clearing Accounts

The Main Purpose of Clearing Accounts

Clearing accounts provide time to review and confirm each item before moving them to their correct locations. This additional step preserves the data integrity of the existing accounts when balancing the books. It reduces the likelihood of accounting errors and fraud.

Clearing accounts can hold virtually any transaction information. Consider the following examples:

  • Shipping details
  • Payroll taxes
  • Quarterly sales
  • Mortgage payments

Three Main Types of Clearing Accounts

When companies set up clearing accounts, the use plays a big role in the type they choose. Consider these three primary examples.

Liability Clearing Accounts

The accounts payable team uses this account to hold funds necessary for paying incoming invoices. Liability clearing accounts can hold these funds before receiving the invoices or processing payment. Some businesses use this account to keep partial savings toward an upcoming lump sum payment for a bill or big purchase.

Asset Clearing Accounts

This is crucial for accounts receivable clearing, especially in cases where payments arrive with no attached invoices. Some companies use the account to store partial payments toward an outstanding invoice until the customer settles the total bill.

Payroll Clearing Accounts

Companies use payroll clearing accounts to hold funds for paying workers, covering payroll taxes, or both. Once each check clears, the account balance automatically drops to zero.

How Clearing Accounts Work

The accounting clearing account is a general ledger and does not belong on the balance sheet. It keeps financial details separate and serves no permanent role. Here is the basic process of using the account:

  1. Add the transactions to the buffer account.
  2. Verify and transfer each entry to their respective accounts.
  3. Continue until the balance of this cash clearing account reduces to zero.
  4. Double-check that each primary account balances.

The timeline for emptying the balance in clearing accounts differs based on the use. For example, accountants might clear taxes annually but close sales records weekly.

How e-Commerce Businesses Benefit From Using Clearing Accounts

Clearing accounts can be especially beneficial for companies with online customers. Here are some of the ways it can help.

Improved Inventory Tracking

Since clearing accounts hold the financial details of transactions, they make it easier to keep track of inventory levels. They also account for the waiting period between recording the initial sale and receiving payment.

Better Fraud Detection

Temporary accounts compel the accounting team to double-check transactions. Given that it serves as a holding area for all transactions, it is easy to spot anomalies that could indicate fraud or inaccuracies.

Easier Expense Calculations

Clearing accounts provide a central location for all related transactions, so businesses can quickly and accurately reconcile their balance sheets. It covers all expense types, ranging from utilities to taxes.

Improved Customer Support

Because clearing accounts house transaction details, customer support representatives can easily review them if a dispute arises for pending transactions. Some customer service reps also use it to reconcile transactions involving returns and refunds.

Balanced Books

Overall, using clearing accounts helps businesses achieve better accuracy and streamline operations. It ensures that all transactions are recorded correctly and quickly reconciled, which can help companies balance their books more efficiently and improve the bottom line.

Best Practices for Clearing Accounts

Clearing accounts is vital for e-commerce businesses that want to maintain accurate and secure financial records, whether you are dealing with orders, returns, payments, or deposits. Even so, how you use them can determine the extent to which you enjoy the benefits.

Do Not Mix Accounts

The first step is to make each clearing account separate from other accounts. For example, if you have tax transactions, create a different account for them and keep it separate from daily cash sales receipts.

Leverage Technology

If you handle thousands of transactions, it might be challenging to reconcile them using a spreadsheet. Instead, consider using accounting software that can help streamline the process and reduce any potential errors from manually reconciling every transaction.

Review Transactions Regularly

Scheduled reviews are the only way to ensure you get the full benefits of a buffer account. It is common for irregularities to occur in the waiting period between recording a transaction and receiving payment. As a result, it is essential to review clearing accounts regularly and report any issues as soon as possible.

The Bottom Line

With e-commerce accounting on the rise, many companies are looking for new ways to streamline their processes. Gaviti makes it easy to automate and simplify the process of collecting accounts receivables. It syncs well with QuickBooks and other accounting software that manages clearing accounts. Book a free demo to see it at work.

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