Learn It
A clearing account is a temporary holding account. Money goes in, and then it goes out to its final destination. The account should normally return toward zero after the activity is complete.
The most common clearing account is Undeposited Funds. When a business receives customer payments — by check, cash, or card — those payments often go into Undeposited Funds first. Later, the bookkeeper groups several payments together into one bank deposit. The grouped deposit is what actually appears on the bank statement.
As we saw in Sales and Revenue and Accounts Receivable, customer payments are not always simple cash deposits. The clearing account helps match what the business received to what actually hit the bank.
Why Clearing Accounts Exist
Imagine a business receives three customer payments in one day: $300, $450, and $250. The bookkeeper records each payment individually. But the business takes all three checks to the bank and deposits them as one combined deposit of $1,000.
If each payment was recorded directly to the checking account, the books would show three separate deposits. But the bank statement would show one deposit of $1,000. During bank reconciliation, nothing would match.
The clearing account solves this. Each payment goes into Undeposited Funds. When the bookkeeper groups them into a deposit, the money moves from Undeposited Funds to Checking. Now the books show one $1,000 deposit — matching the bank statement exactly.
Merchant Processors and Fees
Things get more complex with merchant processors like Stripe, PayPal, or Square. These processors collect customer payments, withhold a fee, and deposit the net amount into the bank.
Here is the critical example: a business receives three customer payments totaling $1,000. The processor withholds $30 in fees and deposits $970 into the bank.
| What Happened | Amount |
|---|---|
| Customer payments received | $1,000 |
| Processor fee withheld | −$30 |
| Net deposit to bank | $970 |
Why simply recording $970 as sales would be wrong:
If the bookkeeper records only $970 as revenue, the business loses $30 of recorded sales. The $30 fee is never recorded as an expense either. Both revenue and expenses are understated. The books do not show the true picture of what happened.
The correct approach: record $1,000 as revenue (the full amount earned), record $30 as a processing fee expense, and record $970 as the bank deposit. The clearing account holds the money in between so every piece is tracked.
When a Clearing Balance Signals a Problem
A clearing account should normally return toward zero. If it has a balance at month-end, that often signals a bookkeeping problem:
- • Customer payments were recorded but never grouped into a deposit.
- • A deposit was started but never completed in the books.
- • A processor fee was not recorded, leaving money stuck in the clearing account.
- • A payment was recorded to the wrong account.
A lingering clearing balance is not something to ignore. It means money is sitting in a holding account instead of reaching its final destination. The bookkeeper must investigate and resolve it.
Do It
Process three customer payments through a clearing account. Enter the payments, the processor fee, the bank deposit, and the revenue earned. The clearing account should end at $0.
Do It — Process Payments Through a Clearing Account
A business receives three customer payments. A payment processor withholds a fee and deposits the net amount into the bank. Your job is to move the money through the clearing account correctly.
The clearing account should end at $0 when everything is moved to its final destination.
Step 1: Customer Payments → Clearing Account
Enter each customer payment amount into the clearing account.
Step 2: Clearing Account → Processor Fee
The processor withholds a fee. Enter the fee amount that leaves the clearing account and is recorded as an expense.
Step 3: Clearing Account → Bank Deposit
The net amount is deposited into the bank. Enter the deposit amount that leaves the clearing account.
Step 4: How Much Revenue Did the Business Earn?
Enter the total revenue the business earned from these three payments. Remember: the processor fee is a separate expense, not a reduction of revenue.
The clearing account is at $0 — all money has moved to its final destination.
Prove It
Answer each question, then read the explanation. There's no score — this is just to help the ideas stick.
Question 1
A business receives three customer payments totaling $1,000. A processor withholds $30 in fees and deposits $970 into the bank. If the bookkeeper records $970 as revenue, what goes wrong?
Question 2
What is the purpose of an Undeposited Funds or clearing account?
Question 3
A clearing account has a balance of $250 at month-end. What does this most likely mean?
Key Takeaways
- A clearing account is a temporary holding account — money goes in, then moves to its final destination.
- Undeposited Funds holds individual customer payments until they are grouped into a bank deposit.
- Recording only the net bank deposit as revenue loses the processor fee and understates both revenue and expenses.
- The correct approach: record full revenue, record the fee as an expense, and record the net deposit to the bank.
- A clearing account should normally return toward zero — a lingering balance signals a bookkeeping problem.
- Clearing accounts make bank reconciliation easier by matching grouped deposits to what appears on the bank statement.