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What is a Clearing Account?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 04 November 2016
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A clearing account is a bank account that is used to hold funds temporarily. There are a number of reasons to use a clearing account and such accounts can be held by businesses, mortgage servicers, escrow companies, and other organizations that handle and process large amounts of money. Such accounts are handled differently from bank accounts maintained for long term deposits.

A common reason to create an account that will hold funds temporarily is for payroll management. Companies that use a payroll account do so to keep their primary accounts secure by ensuring that their bank account numbers are not released on their paychecks, and to help organize their payroll more effectively. Clearing accounts of this nature can work in several ways. Some banks allow businesses to maintain zero sum payroll accounts, with funds transferred automatically as needed when paychecks are deposited. In other cases, a business maintains a separate account for payroll and deposits the amount needed before issuing paychecks.

Clearing accounts are also used for accumulating monies over the course of an accounting period. Once the funds have all been accounted for, they can be transferred to other accounts. This can be helpful for certain bookkeeping practices and may also allow a company to track certain revenues and expenses more easily. These types of clearing accounts are used on a rolling basis to deposit funds before being emptied out with transfers to other accounts.

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Accounts for holding funds can be seen in escrow, where funds are held until a deal is finalized and then released. This type of clearing account is overseen by an escrow agent, a neutral party in a transaction who verifies the completion of the transaction and transfers funds when the time comes. Such accounts can also be created for handling mortgages and other recurring payments. The person making the payments uses the clearing account for those payments only, making them easy to track.

When establishing a clearing account, people are not necessarily required to disclose the intended use to the bank, but it can be useful information to have. A banker may recommend a particular account product or provide options such as automatic transfers to prevent overdrafts if he or she knows why a new account is being opened. Banks will also be less likely to view activity as suspicious if they understand why the activity is occurring. Suspicious activity can result in a hold or freeze being place on the account so the bank can investigate, and this can interfere with the operation of the account.

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eidetic
Post 3

I think using a clearing account for accounting makes a lot of sense. It seems like it would be a lot easier to keep track of money made during a certain time period if it was just kept in a separate account.

I know companies keep records of funds coming in and out, but I think if you put all the money in the same place, there's no way to double check anything. At least if you put certain funds in a clearing account, you can double check the numbers you come up with during an audit with what is actually in the bank account.

indemnifyme
Post 2

@starrynight - The word escrow usually does come up a lot during the home buying process. In fact, I think that's the only time I've ever heard that word used too, but I'm not involved in big business or anything like that.

I do remember hearing that my old boss had a clearing account for our paychecks. One month, he made a mistake and a bank overdraft caused all of our paychecks to bounce. For some reason, he had forgotten to put the money into the clearing account and had left in the regular account. Needless to say, none of us were very happy about it.

starrynight
Post 1

I've never heard of a clearing account before, but I have heard of putting money in escrow when you're buying a house. I believe this is when you make an offer on a house and put money in escrow to show that you have the funds to pay for it. I guess the money goes into a clearing account at that time.

I think it makes a lot of sense to talk to your banker if you're opening an account to work like this. I know I don't usually clear my account completely of money all at once, so I can see how that would look suspicious.

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