Financial accounts in the general ledger hold information relating to a company’s business transactions. Many different types of accounts exist in the general ledger. A specific account companies can use is a clearing account, which is one that retains information for a temporary amount of time, after which accountants move information to other financial accounts.
Clearing accounts can be for just about any transaction in the accounting system. For example, companies with copious cash transactions may use a clearing account to post entries into the ledger. Once in the ledger, accountants review the clearing account and move each transaction into its final account, whether that is the cash, accounts receivable or some other account. Both debits and credits go into the clearing account.
Accounting departments may use a clearing account to separate accounting duties among several individuals. For example, one accountant will receive all cash from customers. He posts the deposits as cash received, with the credit going to the clearing account. A second accountant transfers the transactions from the clearing account to other accounts. She will take the deposits from the clearing account to a receivables account.
A company receives three deposits from customers. The initial entry debits cash and credits the clearing account. The second entry debits the clearing account and credits each account receivable that relates to the cash payments from customers. Another clearing account example is income summary. During the closing process, accountants close all temporary accounts to summarize income prior to closing the accounts to retained earnings.
Implementing a clearing account into an accounting system typically creates more work. While it works well at separating accounting duties, the account could become a mess. Leftover balances or inaccurate postings will leave residual amounts in the account. In most accounting systems, all clearing accounts must be zero. Residual balances can require reconciliations to review and correct problems within these accounts, creating more work for accountants.