What it means
Many business processes have two halves that happen at different times. Goods arrive before the invoice; a card sale is recorded before the processor pays; payroll is calculated before the bank transfer goes; a payment is sent before it clears.
Double-entry accounting needs somewhere to put the first half while waiting for the second. The clearing account is that somewhere.
The mechanics are simple. When the first event occurs, its entry is made with one side to the clearing account.
When the second event occurs, its entry is made with the opposite side to the clearing account, matching the first. If everything matches, the clearing account nets to zero and the two events have been recorded in their proper places (the expense, the asset, the liability, the bank).
If something does not match, the clearing account carries a balance, and the balance is a list of things that have not completed. Examples make the pattern clear.
Payroll: gross wages are debited to expense and credited to a payroll clearing account; tax and pension deductions are debited from the clearing account and credited to the respective liabilities; net pay is debited from the clearing account when the bank transfer is made. If the clearing account does not return to zero, an employee has been paid the wrong amount, a deduction has been mis-posted, or a payment has failed.
Goods received not invoiced: when goods arrive, inventory is debited and the GRNI clearing account is credited; when the invoice arrives, the GRNI account is debited and accounts payable credited. A balance in GRNI represents goods received for which no invoice has been processed, which may be legitimate (the invoice is in the post) or a problem (the invoice was lost, or was paid without matching).
Card settlements: sales are debited to a card clearing account at the point of sale; when the processor settles, bank is debited and the clearing account credited, with the fee to expense. A balance is unsettled sales or an unreconciled settlement.
The control is reconciliation at a frequency matched to volume: daily for card and cash clearing, weekly for payroll, monthly for GRNI and intercompany. The reconciliation lists the items making up the balance, their age and their status, and old items are investigated and cleared.
A clearing account that is reconciled only in total, or whose balance is simply carried forward, is not a control but a hiding place: unmatched items accumulate, errors persist, and, in the worst cases, misappropriations are parked there because nobody looks. Suspense accounts are the general-purpose clearing account: a place for entries whose correct classification is not yet known, such as an unidentified bank receipt or a difference found in a reconciliation.
The same rule applies with more force: every item in suspense should be identified and cleared within days, and a suspense balance at a period end should be nil or explained item by item. Auditors treat old suspense balances as a sign of weak control.
In practice
Real-world examples.
Example
A retailer reconciles its card clearing account daily against the processor's settlement report, and a $2,000 shortfall reveals a batch of refunds processed twice.
Example
A group's intercompany clearing accounts are reconciled monthly, with both sides agreeing balances before the consolidation is run.
Example
A company's suspense account holds an unidentified $15,000 receipt for four months until an audit query identifies it as a customer's overpayment.
Think of it
“A clearing account is a temporary holding spot-where transactions wait until you know where they belong.
Formula
Calculation
Clearing account balance = Sum of first-half entries minus Sum of matched second-half entries; target zero after each cycle
Reconciliation: list every open item with date, amount, source and expected clearing event; age items; investigate and clear items older than the normal cycle
Worked example 1, payroll clearing. A company's monthly payroll: gross salaries $420,000; employee income tax withheld $84,000; employee pension contributions $21,000; employer pension contributions $25,200; employer payroll tax $33,600; net pay $315,000.
Entries:
- Debit salaries expense $420,000; credit payroll clearing $420,000
- Debit employer pension expense $25,200; credit payroll clearing $25,200
- Debit employer payroll tax expense $33,600; credit payroll clearing $33,600
- Debit payroll clearing $84,000; credit income tax payable $84,000
- Debit payroll clearing $46,200 ($21,000 + $25,200); credit pension payable $46,200
- Debit payroll clearing $33,600; credit payroll tax payable $33,600
- Debit payroll clearing $315,000; credit bank $315,000 (net pay run)
Clearing account: credits $420,000 + $25,200 + $33,600 = $478,800; debits $84,000 + $46,200 + $33,600 + $315,000 = $478,800. Balance nil. The reconciliation is complete.
Suppose the bank run rejects two employees' payments ($6,100) because of closed accounts. The bank entry is $308,900 rather than $315,000, and the clearing account carries a credit balance of $6,100. The reconciliation lists two items, each with the employee's name, and they clear when the payments are re-sent. Had the balance been carried forward without a list, it might have grown as more rejects accumulated, and an employee who left without being paid would never have been noticed.
Worked example 2, goods received not invoiced. A manufacturer's GRNI clearing account at month end shows a credit balance of $312,000. The reconciliation lists 84 open goods receipts. Analysis: 61 receipts ($228,000) under 30 days old, normal; 15 receipts ($54,000) 30 to 90 days old, invoices chased with suppliers; 8 receipts ($30,000) over 90 days old. Investigation of the 8 finds three cases ($11,000) where the invoice was received and paid but matched to a different receipt line, leaving both the paid invoice and the receipt open (corrected by re-matching); four cases ($16,000) where the supplier never invoiced (a $16,000 windfall that the company decides, after six months, to release to profit while noting the supplier's right to invoice); and one case ($3,000) where the goods were returned and the receipt should have been reversed. After the review, the balance is $282,000, all under 90 days and listed. Without the review, the $30,000 of old items would have sat in the account indefinitely, overstating liabilities and hiding the matching errors.Case study
Seen in the real world.
A distribution company's bank reconciliation had for two years included a line "cash clearing account balance" of between $40,000 and $70,000, described as timing differences. The accountant responsible had retired, and her successor asked what was in it. The account had 340 open items going back three years: customer payments received and not applied, supplier payments recorded twice, bank charges never posted, a $12,000 refund from a supplier never identified, and, on investigation, $23,000 of customer receipts that had been posted to the clearing account and then transferred out to a personal account by a former payroll clerk who had had access to both.
The fraud had been possible because the clearing account was reconciled only in total, its total was always "about right", and nobody had ever listed the items. The company cleared the account over two months, recovered $9,000 from the clerk, and introduced a rule: every clearing and suspense account is reconciled item by item at least monthly, items over 30 days are reported to the finance director with an explanation, and no clearing account may carry a balance at year end without a listed and approved reconciliation. The finance director's note said that the balance had been small, stable and completely meaningless, which was exactly why it had been dangerous.
Watch out
Common mistakes.
- Reconciling a clearing account by its total rather than item by item, which lets errors and misappropriations hide within a plausible balance.
- Carrying clearing or suspense balances forward month after month without ageing and investigating the items.
- Using suspense as a permanent home for anything hard to classify, rather than as a short-term holding account with a rule that every item is cleared within days.
Questions
People also ask.
What is the difference between a clearing account and a suspense account?
A clearing account is for a specific two-step process (payroll, card settlement, GRNI) and clears as the second step completes. A suspense account is general-purpose, for items whose classification is unknown. Both should return to zero; suspense should do so faster.
How often should clearing accounts be reconciled?
As often as the process runs: daily for cash and card clearing, each pay run for payroll, monthly for GRNI and intercompany. Every reconciliation lists the open items and their age.
Should a clearing account have a balance at year end?
Only if it consists of listed, explained items in the normal cycle (goods received last week, card sales awaiting settlement). Unexplained or aged balances should be cleared before the accounts are finalised.
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