A clearing account, also known as a suspense account, is a temporary holding account used to record transactions until they are permanently assigned to the appropriate accounts. Once the correct account is identified, the amount in the clearing account is transferred.
Here are a few examples of journal entries involving a clearing account:
Example 1: Payroll Clearing Account
Scenario: Your business processes payroll and the total payroll amount is $50,000. You use a payroll clearing account to temporarily hold payroll expenses until payments are made.
Journal Entry 1: Recording Payroll in Clearing Account
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-20-2024 | Payroll Expense A/c Debit | 50,000 | |
| 08-20-2024 | To Payroll Clearing Account A/c | 50,000 |
Explanation:
- Payroll Expense will debited to record the payroll expense.
- Payroll Clearing Account will credited to temporarily hold the amount until the payroll is processed.
Journal Entry 2: Clearing the Payroll Account
Scenario: The payroll payments are made, and the clearing account is now cleared.
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-21-2024 | Payroll Clearing Account A/c Debit | 50,000 | |
| 08-21-2024 | To Cash A/c | 50,000 |
Explanation:
- Payroll Clearing Account will debited to clear the account.
- Cash will credited to record the cash outflow for payroll payments.
Example 2: Bank Clearing Account
Scenario: Your business receives a payment of $10,000 that is not immediately recognizable. You temporarily post it to a bank clearing account.
Journal Entry 1: Recording the Payment in the Clearing Account
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-05-2024 | Bank Clearing Account A/c Debit | 10,000 | |
| 09-05-2024 | To Accounts Receivable A/c | 10,000 |
Explanation:
- Bank Clearing Account will debited to temporarily hold the unidentified payment.
- Accounts Receivable will credited to remove the payment from the receivables.
Journal Entry 2: Allocating the Payment to the Correct Customer
Scenario: After identifying the payment, you assign it to the correct customer account.
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-10-2024 | Accounts Receivable A/c Debit | 10,000 | |
| 09-10-2024 | To Bank Clearing Account A/c | 10,000 |
Explanation:
- Accounts Receivable will debited to reflect the payment made by the correct customer.
- Bank Clearing Account will credited to clear the account.
Example 3: Inventory Clearing Account
Scenario: Your business orders $15,000 of inventory, but the goods have not yet been received. You use an inventory clearing account to hold expenses temporarily.
Journal Entry 1: Recording the Inventory Purchase
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-15-2024 | Inventory Clearing Account A/c Debit | 15,000 | |
| 09-15-2024 | To Accounts Payable A/c | 15,000 |
Explanation:
- Inventory Clearing Account will debited to temporarily hold the cost of the ordered inventory.
- Accounts Payable will credited to recognize the liability.
Journal Entry 2: Receiving the Inventory
Scenario: The inventory is received, and you clear the inventory clearing account.
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-20-2024 | Inventory A/c Debit | 15,000 | |
| 09-20-2024 | To Inventory Clearing Account A/c | 15,000 |
Explanation:
- Inventory will debited to reflect the receipt of the inventory.
- Inventory Clearing Account will credited to clear the account.
These examples show how a clearing account is used to temporarily hold funds until they are properly allocated, ensuring accurate and organized financial records.