Sometimes we have to use accounts to help facilitate the processing of certain types of transactions in our system. Transfers Clearing is one of those accounts. This account exists solely to facilitate the processing of a transaction that affects two business financial accounts.
Why must the Transfers Clearing account exist?
Let’s assume the business has an operating account and a credit card account. A payment is made on the credit card from the operating account totaling $5,000. The flow of transactions looks like this:
|Transfers Clearing||$5,000||Processing payment from Operating Account to Credit Card Account|
|Operating Account||$5,000||Cash outflow|
|Credit Card Payable||$5,000||Payment made on Credit Card, which reduces the outstanding balance on the card|
|Transfers Clearing||$5,000||Processing payment from Operating Account to the Credit Card Account|
As you can see, this account is a zero balance account. This means that we expect the balance is this account to be $0 every day. Sometimes it takes one business day for both sides of the transaction to clear the financial institutions, but there are no other exceptions to the rule. If there is a carrying balance in this account further investigation is required.
Bill.com Clearing Account
Our Bill.com (money out) clearing account operates in a similar way. When a payment is made on a bill, the account will be debited. Then, Bill.com will automatically create an entry to apply those payments to reduce the specific vendor’s accounts payable ledger and the clearing account will be credited.
Let’s assume we paid two bills in one day out of the checking account. The bills totaled $10,000. The journal entry to record the payment would be as follows:
|Bill.com Clearing||$10,000||Recording the payment for all invoices paid for the day|
|Checking Account||$10,000||Amount paid out of the checking to Bill.com for bills paid for the day|
But what does the journal entry look like when applying those payments to the specific vendors?
You can expect to see something like this:
|Bill.com Clearing||$10,000||Clearing the total payment so it can get applied to the Accounts Payable for each vendor invoice|
|Accounts Payable - Vendor 1||$5,000||Vendor 1 invoice payment applied to Accounts Payable|
|Accounts Payable - Vendor 2||$5,000||Vendor 2 invoice payment applied to Accounts Payable|
In most cases, this account should be $0 at all times during the month. There are times where there could be a day or two delay when a credit is received for voided checks. Ultimately, like the Transfers Clearing account, if there is a carrying balance in this account further investigation is required.