Do you use Stripe, Square, Shopify, Paypal or even QuickBooks Payments? Do you pay your employees or vendors by direct deposit or third party software? Find out why you need to a have a clearing account - and how to set one up in QuickBooks Online.
Introduction: What is a Clearing Account and Why is it Important in QuickBooks Online?
Let's clear things up about clearing accounts and their purpose in accounting, specifically in QuickBooks Online. A clearing account is an accounting term for a temporary account used to “hold” funds or transactions that are involved in a transfer, such as between your company’s bank account and your payment processor, until the time they are reconciled and “zeroed out” at the end of an accounting period.
In QuickBooks Online, a clearing account can be created as a type of asset account in your Chart of Accounts. It will act as a bridge between different accounts, allowing you to temporarily store funds or transactions until they clear.
Why Your Company Needs to Use a Clearing Account
The purpose of a clearing account is to maintain accurate and organized financial records. By using this account, you can ensure that all your transactions are properly recorded and accounted for, even if they haven’t reached their final destination.
So if your company uses a payment processor like Paypal, Square, Stripe, Shopify, etcetera, you’ll definitely need a clearing account.
If you’re paying your employees or vendors via direct deposit service through your bank or a third party such as Telpay, Plooto, Quadient/Beanworks, etcetera, you’ll also need to consider a clearing account.
Why? Let’s use payroll as an example - you’ve created the paycheques in QuickBooks Online, but your bank has not yet taken the funds out, and won’t until two days before payday, next week. We need to make sure your books accurately reflect your bank balance and your financial reporting shows the paycheques are prepared for transfer.
Now let’s talk in terms of payment processors, like Shopify and Square. The clearing account will “wash” the transfers from such processors with the sales data in your books. If you do $100 in sales via Paypal today, they may not pay you out for a few weeks. We need to record that money that is to be received from Paypal.
As you see, clearing accounts help us to see where our money is when it’s in the middle of a transfer. And, when you are receiving lump sum payments from processors, or paying multiple employees/vendors in a lump sum, a clearing account makes reconciliation so much easier.
When they don’t reconcile to a $0 balance, they help us see exactly which payouts your payment processor missed - and which employees weren’t paid, or were maybe double paid!
So, think of the QuickBooks Online clearing account as your trusty assistant that helps keep your financials in order. It's like having a designated spot for those "in-between" transactions until they find their rightful place in your books.
Using the Clearing Account for Accurate Cash Flow Management
Cash flow management is a crucial aspect of any business, and with the help of clearing accounts, tracking deposits and withdrawals, and monitoring cash inflows and outflows, it becomes much easier to stay on top of your finances.
Clearing accounts act as a central hub for all financial transactions, ensuring that everything is accounted for. By tracking deposits and withdrawals, you can have a clear picture of where your money is coming from and where it's going. This allows you to make informed decisions about spending and budgeting.
Monitoring cash inflows and outflows gives you real-time visibility into the financial health of your business. It helps you identify trends, spot potential issues early on, and make adjustments as needed.
Whether it's keeping an eye on payment processors or managing vendor payments and payroll, having a clear understanding of your cash flow is essential for staying financially stable.
So if you want to take control of your finances and ensure smooth cash flow management, you can use a clearing account to track those deposits and withdrawals.
Setting Up a Clearing Account in QuickBooks Online
Ready to dive into QuickBooks Online and learn how to create that clearing account? Setting up a new account and adding it in QuickBooks Online is super easy, so let's get started!
To create a clearing account, first sign in to your QuickBooks Online account. Once you're in, head over to the Chart of Accounts. You can find this by clicking on the “Bookkeeping” or "Accounting" tab on the left-hand side menu.
Next, click on "New" to add a new account. You'll be given a few options for the type of account you want to create. In this case, we're looking for an asset account, so select "Bank" as the category. Then choose the detail type as “Chequing”.
Now it's time to fill in some details for your clearing account. Give it a name that makes sense to you – something like "Square Clearing" or "Payroll Clearing".
After that, hit Save and voila! Your clearing account is now created and ready for action. You can now use this account as an intermediary when transferring funds between different accounts.
And just like that, you've successfully set up a new clearing account in QuickBooks Online. Remember that now you must redirect your transactions to the clearing account, and you must reconcile the account regularly.
Tips for Properly Using a Clearing Account in QuickBooks Online
After you’ve created your clearing account, you’ll need to make sure you point your sales and/or payments to it.
Using the Clearing Account with Payment Processors
In QuickBooks Online, you’ll have to begin posting your Sales Receipts to your newly created account - the clearing account. And if you’re using Invoices, make sure you receive payments to the clearing account as well, NOT your bank account.
If you’re using a third party app like PayTraQer, Saasant, OneSaas, etc. to import your transactions, you’ll need to map it correctly to the new account.
The bottom line is that all transactions in QuickBooks Online that are going to be receiving payment through your processor will need to have their payment posted to the clearing account.
Then, in your bank feed, you’ll need to post those incoming deposits from the processor as a transfer to the clearing account.
Using the Clearing Account with Payroll and Vendor Payments
On the other side of the coin, if you’re using a clearing account payroll or other direct deposit vendor payments, you’ll have to now post them as being paid by the clearing account.
Make sure you also transfer the outgoing payment (usually a lump sum) in your bank into the clearing account.
PRO TIP: You can save time by using the Rules feature in QuickBooks Online to prepare these transfers for you.
The Reconciling of the Clearing Account
Now let's talk about the nitty-gritty of managing transactions and keeping things in order. When it comes to reconciling transactions with clearing accounts, it's all about making sure everything matches up.
For payment processors like Square, Paypal, Stripe, etcetera, we recommend doing a reconciliation monthly, or at a minimum, quarterly.
For payroll, keep an eye on the balance after you’ve reconciled your bank account and the funds are distributed. Reconcile annually with your fiscal year.
You’ll perform this reconciliation in the same way as your traditional bank reconciliations, however if the payments roll over an accounting period then you’ll have to exclude those till you zero out.
For example you sold product April 30 but it’s not being paid out by Square till May 2. The April 30 sales receipts will therefore not be reconciled and should end up in the reconciliation for month ending May 31.
To summarize, you’ll only be reconciling what money was actually received. They would be included in the next period’s reconciliation.
Detecting and Resolving Issues with Clearing Accounts in QuickBooks Online
When you’re performing the reconciliation, you’ll be able to easily identify pending transactions, outstanding payments or receipts, and ensure that your financial records are accurate.
Any transactions that aren’t allowing you to achieve the zero balance will need to be investigated. As mentioned above, transactions near the end of the accounting period might overlap, and would be put into the next period. But transactions that appear to be completely missing from your bank will certainly need a second look.
Possible causes would include duplicate or missed sales transactions, duplicate or missed vendor payments, an employee who is not supposed to be on payroll, transposition error, data import issues, etcetera.
The clearing account will certainly help in narrowing down these issues.
Conclusion: Streamline Your Bookkeeping with Clearing Accounts in QuickBooks Online
In conclusion, utilizing clearing accounts in QuickBooks Online can greatly streamline your bookkeeping process. By properly categorizing and reconciling transactions through clearing accounts, you can ensure accuracy and organization in your financial records.
They allow you to easily track and manage funds flowing in and out of your business, making it easier to identify any discrepancies or errors.
By regularly reviewing and reconciling your clearing accounts, you can maintain a clear and accurate picture of your financial health. This will not only save you time when categorizing your transactions via the bank feed, but also provide valuable insights into the financial performance of your business.
So why wait? Start leveraging the power of clearing accounts in QuickBooks Online today and take control of your bookkeeping like never before!
Contact us today for more information on setting up your clearing accounts for success!