In accounting, "clearing an account" often refers to bringing the balance of a specific temporary or buffer account down to zero by transferring its contents to their final destination accounts. This process is crucial for ensuring accuracy and transparency in financial records, particularly when using accounts designed to hold transactions temporarily.
A clearing account (sometimes called a buffer or suspense account) is a temporary general ledger account used to hold transactions until they can be properly classified and transferred to their permanent accounts. A common example is a cash clearing account, which might be used for deposits where individual checks need to be identified before posting to customer accounts.
Clearing such an account involves a systematic process to match and move transactions. Based on standard accounting practices and the provided reference, the steps typically involve:
- Adding Transactions to the Buffer Account: Initial transactions are recorded in the clearing account. These entries might represent incoming cash receipts, payments being processed, or other items awaiting final classification.
- Reference step 1: Add the transactions to the buffer account.
- Verify and Transfer Entries: Each transaction within the clearing account must be verified against supporting documentation. Once verified, the entry is transferred out of the clearing account and into its appropriate permanent account (e.g., Accounts Receivable, Revenue, Vendor Payable). This is done by posting offsetting entries.
- Reference step 2: Verify and transfer each entry to their respective accounts.
- Continue Until Balance is Zero: The process of verifying and transferring entries continues until all transactions within the clearing account have been moved to their final destinations. The goal is to reduce the balance of this account to zero.
- Reference step 3: Continue until the balance of this cash clearing account reduces to zero.
- Double-Check Primary Account Balances: After the clearing account balance is zeroed out, it's essential to ensure that the balances in the primary accounts (where the transactions were moved) are correct and that the overall accounting equation (Assets = Liabilities + Equity) remains in balance.
- Reference step 4: Double-check that each primary account balances.
Think of a clearing account like a temporary holding area. Items are placed there briefly, sorted and identified, and then moved to their permanent shelves (the final general ledger accounts). The goal is to empty the holding area regularly so its balance is zero.
Why Use Clearing Accounts?
Clearing accounts are useful for several reasons:
- Matching Complex Transactions: They help reconcile transactions where the incoming or outgoing payment doesn't immediately match a specific invoice or source document (e.g., bulk payments covering multiple invoices).
- Process Efficiency: They allow for recording cash flow immediately while delaying the detailed accounting distribution until later.
- Error Identification: A non-zero balance in a clearing account indicates that transactions haven't been fully processed or that there might be an error in the entries.
- Interim Holding: They serve as temporary storage for items that cross accounting periods or require approval before final posting.
By diligently following the steps to clear these temporary accounts, accountants maintain accurate and up-to-date financial records, ensuring that all transactions are ultimately recorded in the correct general ledger accounts.
