What is a Clearing Account?

Sometimes called a holding account, a wash account, a barter account, or simply a temporary account - a Clearing Account exists for a business to use like a ledger as a reminder of goods and services rendered that have not yet been fully recorded. The outline below shows examples in QuickBooks Online, but the same methods will work for QuickBooks Pro, Premier or Enterprise.

Why Use a Clearing Account?

Sample Checking Account

In the above chart of accounts, you can see a Bank of America (BoA) sample checking account which is connected directly to the businesses bank feed.

In this account register, deposits that occur from online order sources are periodically deposited when the holder of those funds releases them for disbursement. The disbursement of funds happens at various different times depending on the payment processor or sales platform doing the processing.

When the disbursement occurs and syncs via your bank feed to the bank register in the accounting software, it will post as the finalized deposit value only. This one-line entry is enough to say that your bank account balance is current in the accounting software, but it is not reconcilable with any information related to the original sale, inventory, or payment fees that were processed to summarize the deposit.

In order to properly attribute that deposit information to accounts, goods and services that were rendered, or expenses that were paid, the accountant will typically do a journal entry or transfer related to the original sale information.

Traditionally, this can be done from the Undeposited Funds account, where individual sales are essentially entered as cash on hand until they are manually matched and transferred to the bank account. With the velocity in which online transactions happen, the multitude of fees that can be processed along the way, and the complex sales data that holds that information - entering and reconciling transaction by transaction from Undeposited Funds is an extraordinarily difficult task for an ecommerce business.

To send transactions from Undeposited Funds to the Bank Register, a Bank Deposit is typically done. Deposits like this from Undeposited Funds are rigid and don’t allow you to adjust for fees attributed after the sale, or for batching multiple transactions into a single deposit. Additionally, you can not process refunds for customers out of Undeposited Funds.

Bank Deposit

A Clearing Account is often preferable in ecommerce transactions due to the fact that goods and services are frequently rendered hours, days, and in some cases even weeks before payment is cleared to the seller’s bank. For the purpose of inventory tracking, fulfillment, and a variety of other reasons, it’s common for a business to record the initiation of this sales process and relief of inventory well before the final deposit.

Recording these sales into the Undeposited Funds account not only causes problems in reconciliation due to the rigidity of deposits but also due to recognized revenue as cash on hand that the business has not yet received.

Instead, when deposited to the Clearing Account, expense or refund information can be subsequently processed and matched to the existing transactions before they are deposited to the bank, or reconciled.

Transferring from a Clearing Account to a Bank Account

When the disbursement of funds occurs from a payment processor like Amazon Seller, Shopify Payments, or PayPal, and the deposit syncs through the bank feed of your accounting software, it’s time to clear the Clearing Account.

In manually processing this information, sales that were entered daily to the Clearing Account to remove inventory and fulfill orders can now have their related refunds and fees entered into the Clearing Account for the processing period. Once all refunds, payment fees, and the original sale information have been entered into the clearing account, a transfer and match should occur to reconcile the sales data.

In juxtaposition to reconciling from the Undeposited Funds account, which requires manually checking each transaction to be included in the deposit, a transfer from the Clearing Account only requires that all transactions for the period to of been entered, and that the final balance can be transferred.

Bank Transfer

Enter the total deposit amount to be transferred from the Clearing Account to match with the bank feed deposit amount. From within the bank feed, this amount can now be matched.

The Clearing Account continues to hold the individual or batched sale and expense information that was entered to assist in granularity when reporting and investigating business metrics without the cumbersome matching process involved in individually matching undeposited funds. Additionally, the Clearing Account can retain a balance in the event that sales have been entered for the upcoming deposit period, a common case in ecommerce sales where there is no clear end of day to the business. And the end of day often does not dictate the transactions that will or will not clear and deposit for the day.

In short, the Clearing Account provides for the flexibility of accurate and insightful sales information without the burden of disruptive cash on hand reconciliation that is involved in using undeposited funds for ecommerce transactions.

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