Why use clearing accounts in your accounting system?

Learn why you need to use clearing accounts in your accounting systems.

In our highly-connected, networked, and real-time information world, you might imagine that when you make a payment on a credit card, the amount is immediately transferred to the merchant. However, this generally isn't the case.

On average, it takes 2-3 days for funds to clear through the various banking systems around the world. The more parties there are in between the transaction, the longer it can take.

For now, if you’re an e-commerce merchant and you use a payment gateway to collect money from customers, whether it’s a credit card or another payment form, there’s a delay of 1-3 days in the funds coming into your bank account. 

How the workflow looks without a clearing account

1. A customer checks out of your shopping cart.
2. You raise an invoice or a sales receipt that increases your revenue and the accounts receivable in your accounting system.
3. You pay the invoice in your accounting system against your bank account. This is where the challenge begins (unless you’re using PayPal - see below).

How the workflow looks with PayPal

1. A customer checks out of your shopping cart.
2. You raise an invoice or a sales receipt that increases your revenue and the accounts receivable in your accounting system.
3. You pay the invoice in your accounting system against the PayPal bank account you set up. This should auto-match against the bank feeds coming from your PayPal account. Work with your bookkeeper so that your workflows facilitate this.

In the cases above, the receipts from customers in your accounting system won’t match the bank feeds. If you make a sale on November 30, the money may not be in your bank account until December 2.

An accounting system where the cash value on your balance sheet doesn’t equal the bank statement can be challenging to work with, so the time needed for the credit card to clear can be an issue. This is why we suggest the use of clearing accounts.

How the workflow looks with a clearing account

1. A customer checks out of your shopping cart.
2. You raise an invoice or a sales receipt that increases your revenue and the accounts receivable in your accounting system.
3. You pay the invoice in your accounting system against your credit card clearing account.
4. You mark receipts that come in from your bank feed against that clearing account - money in, money out.

The balance of the clearing account at the end of the month would be made up of two amounts. Run a balance sheet to see it.

Amounts are shown as paid in your shopping cart which haven’t been received yet into your bank account. As a check, this is normally 2-3 days trading. Most merchants charge the merchant fee separately, rather than offset it against your receipts.

If there are differences, it could be that your merchant facility is still doing an offset. Chargebacks from customers are not always easy to detect. The clearing account reconciliation makes sure you’re aware of them.

This isn’t ideal, though. There’s substantial manual work in reconciling the amounts you get as receipts on your bank statement vs. sales from your shopping cart. And the different dates also compound the problem of matching these off.

Use a clearing account. At the end of the month, take a look at the balance. If it’s substantially different from 2-3 days sales, it’s worth looking into to check for leakage in your business.