What is a clearing account for ecommerce business

What is a clearing account and how to use it for e-commerce business purposes

If your head is spinning from the number of accounts that your business has, this article will provide you some relief. At least, when it comes to understanding what a clearing account is and how any e-commerce business can benefit from it.

Contents:

What is a clearing account?

How does a clearing account work?

Difference between a clearing account and a checking account

Benefits of using a clearing account for your e-commerce business

Setting up a clearing account

How to reconcile in QuickBooks using a clearing account

What is a clearing account?

Sometimes there is a need for a safe buffer space for different types of transactions that have not yet taken place, or require some type of specific detailing or processing.

Here, the information about the movement of finances is kept temporarily just until it is smoothly transferred to the main account. 

Thus, a clearing account helps segregate transactions from the principal accounting ledger.

Clearing account definition

According to the Accounting Coach dictionary, a clearing account is:

“A general ledger account which serves to summarize similar transactions.”

Typically, clearing accounts contain amounts that are to be transferred to another account later. For example, an account with revenue and expense amounts that are to be transferred to retained earnings at the close of a fiscal period. 

Related terms for a clearing account you can encounter:

  • zero-balance account
  • temporary account
  • buffer account
  • wash account
  • summary account
  • holding account

These clearing accounts (can be just one or many) can be сreated for you automatically by integration software like Synder.  

When you use accounting systems, like QuickBooks or Xero, a clearing account there is a buffer account created in the Chart of Accounts section. It temporarily holds the records of transactions synced into the system, for example, from an e-commerce platform or a payment processor.  

The purpose of a clearing account

The purpose of this type of account is to set aside the payment details before the ultimate transaction finalization.

Accountants use clearing accounts to store money-in and money-out information for a short period of time until everything is ready to be officially registered in the permanent records. 

Businesses can use clearing accounts to document all sales, items, fees, and shipping details, taxes, or other expenses that have not yet been fully and properly accounted for. A clearing account becomes very helpful in managing accounts receivable too (let’s say, in the case of unpaid invoices). 

Generally speaking, a clearing account is useful anytime a business or an accountant wants to deal with certain types of transactions or keep some specific money flow details separate before balancing the sheets.

The general flow looks like this:

  1. Enter transactions into a safe buffer space
  2. Zero out the balance
  3. Move transactions to the principal account

But let’s see it in more detail.

How does a clearing account work?

A clearing account is a general ledger, which helps businesses and accountants to keep the details about financial transactions on a temporary basis. It’s created to just record the income or the expenses before they will move to the retained earnings in the balance sheet.

Clearing accounts are “cleared” systematically. It means that all of the data from this account gets transferred to another place, and the balance becomes equal to zero. The account can get cleared at the end of the fiscal year, monthly, or sometimes even daily. For example, a clearing account used to record utility expenses may be closed monthly, whereas an account of daily cash receipts might be closed each day.

When the balance of the clearing account is perfectly zeroed, then you know that your bookkeeping is done correctly. All information can be registered in the main accounting ledger without errors.

Clearing accounts for payment gateways

Synder creates clearing accounts in your accounting system (QuickBooks or Xero) that reproduce the real money flows from any payment gateway.  

There is a vast list of e-commerce platforms or payment providers with which Synder can integrate. If not, you can always import payments from Excel. So, technically any gateway you can possibly receive payments from can be accounted for by Synder.

Let’s say, your business receives payments via Stripe from a customer. The money gets transferred from the customer’s Stripe account to yours and is kept there for some time. You can’t see them on your real bank account or manage this money for a moment.

That is how a clearing account mimics a real-life situation and plays the role of a payment provider in the accounting system. The clearing accounts created by Synder will also be named after the payment provider, e.g. the Stripe bank account.

By the balance of this clearing account, you can easily track if all transactions are in the accounting. Depending on the settings, they can be kept here for a day, a week, or a month.

If all types of transactions are synced, all sales and payouts, then the balance of the clearing account in your QuickBooks or Xero will be equal to the Stripe account balance (or whichever gateway is connected).


Difference between a clearing account and a checking account

Now you know that funds are stored in the clearing account for a short period of time, before being relocated somewhere else. Where do they go?

In Synder, transactions from the clearing account go to your checking account. So, it’s important to understand the difference between these two types of accounts.

This accounting automation software uses the flow with a clearing account instead of just syncing deposits to a checking account. By doing this, Synder achieves a high level of accuracy in reconciliation and makes the process easier for users.

Checking Account Definition

A checking account is a bank account that allows you to withdraw and deposit money.

Related terms for a checking account are:

  • current account
  • bank account
  • transactions account
  • deposit account

In your accounting software, a checking account is your current bank account that you connect to the accounting system and use for money transfers and reconciliation.

Clearing account vs. Checking account

Clearing accountChecking account
Buffer account in the accounting softwareReal account in the bank connected to the accounting software
Keeps only transaction informationKeeps both real money and transaction information
Records data temporarilyRecords data permanently

Benefits of using a clearing account for your e-commerce business

E-commerce businesses can benefit largely from using clearing accounts in their bookkeeping.  

Here are some of the reasons why:

  1. Easier inventory tracking. For the purpose of inventory tracking and fulfillment, it’s common for an e-commerce business to record the initiation of the sales process and relief of inventory well before the final deposit.
  1. Managing refunds and returns. When saved to the clearing account, expense or refund information can be processed and matched to the existing transactions before they are finally deposited to the bank, or reconciled.
  1. Simpler calculations of expenses. The advantages of the clearing account extend to almost all types of expenses and payments, starting with sales tax and ending with processing payroll. 
  1. Diminishing errors and discrepancies. Clearing accounts are used separately from the main ledger and the actual checking bank account. This helps reduce the possibility of unwanted mistakes in reporting to the minimum.
  1. High level of detail. Using a clearing account as a buffer allows business owners and accountants to match all kinds of financial details in a “buffer” mode. The balance of the clearing account helps identify issues if that’s the case. If something doesn’t match, it’s easier to track what is missing. 
  1. Accounting for multiple e-commerce businesses or payment providers. Synder creates a separate clearing account in your accounting system for each e-commerce business (if you have many) or a payment processor. For example, you can have one clearing account for Shopify payments, another one for PayPal, and a different one for Stripe transactions. This separation of money flows facilitates the bookkeeping process by helping to identify the issues and discrepancies precisely.
  1. Accurate reconciliation. In clearing accounts, reconciliation is trouble-free, as you are not afraid to mess up the books. If there are issues or missing transactions, they can be easily identified. If all transactions match and the account clears to a zero balance, then reconciliation is successful.

Setting up a clearing account

It is easy to set up a clearing account when you use Synder. Basically, you just choose to connect your preferred accounting software: QuickBooks Online, QuickBooks Desktop, or Xero. And the software does everything for you. 

You only check the state of your account periodically and accomplish your clearing account reconciliation. A zero balance remaining in your clearing account after this period means that your reconciliation has been completed successfully and no issues were detected in your books.  

Clearing account in QuickBooks

Synder can supercharge your accounting and make the whole bookkeeping and financial reporting process easier for business owners and professional accountants.

Here is an outline for how a clearing account works for the QuickBooks integration:

  • Synder creates a clearing account for you once the connection with the accounting and payment platforms has been made.
  • This account becomes one of the two accounts Synder works with in QuickBooks: a clearing and a checking account to which your bank feed is connected.
  • The software uses it for recording sales transactions, fees, and refunds (so you have the correct gross and net income amount recorded).
  • Then this clearing account is to be reconciled with the payment processor and your checking bank account.

How to reconcile in QuickBooks using a clearing account

Once all payment details, including refunds, payment fees, and the original sale information, have been entered into the clearing account in your QuickBooks, it’s time to match transactions and reconcile the sales data.

How it happens:

  • When a payment processor (for example, Stripe or PayPal) sends a payment settlement to your bank, Synder reflects this by making a transfer from the clearing to your checking account.
  • This account is reconciled with your actual bank.
  • QuickBooks automatically highlights those pieces that match and all you need to do is click Match or Confirm to finish the process.

Synced vs. Cleared vs. Reconciled Transactions

You may be wondering how to find transactions that were just synced by Synder in your accounting, and what their status is.

Look for the results of synchronization directly in your accounting system:

  1. When you see the transactions appear in Synder with the green status Synced, it means that the transaction is synchronized by the system. You can now find it in the clearing account in the Chart of Accounts in QuickBooks or Xero.
  1. After you click to reconcile transactions, you will see the status Matched or Confirmed. It means that the transactions are reconciled with your bank account connected to the accounting.
  1. Finally, once the transactions have been reconciled, they move from the clearing account to the checking, which means, they get cleared.

Summary

Clearing accounts give e-commerce business owners and professional accountants the flexibility which is necessary for achieving the most accurate and insightful sales information.

It is a handy tool for the storage of temporary transactions in a buffer space, where all sale and expense information that was entered can be safely reconciled without any damage to the books.

Additionally, the clearing account can signal if some transactions are missing in case the balance does not zero out or match your payment provider’s account. 

It becomes easy to manage finance, even with multiple e-commerce platforms and payment gateways connected, as Synder accounts for each of them in a separate clearing account created automatically for you.


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Olga Shvets

Olga Shvets

Olga is a FinTech writer with a degree in Intercultural Communications and business experience in e-commerce. Passionate about all things money and the principles of human behavior. Financial psychology and the trends of worldwide markets are her favorite topics to investigate.

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