What Is a Clearing Account?
A clearing account is a General Ledger (GL) account on your Balance Sheet. It is called a “clearing” account because its sole purpose is to hold money temporarily until those funds are transferred to their permanent account (most often the primary business checking account).
A clearing account is designed so that the balance clears out over time. Money goes in, and money goes out.
While bookkeepers use clearing accounts for various workflows, such as payroll processing, this post focuses on the most common use case for small businesses: Third-Party Payment Processors (e.g., PayPal, Stripe, Square, or Shopify).
Why I Recommend Clearing Accounts (vs. Just Recording Net Bank Deposits)
When you receive deposits from payment processors in your business checking account, it can be tempting to code those incoming bank deposits directly to Sales.
Coding net deposits directly to Sales creates two problems on your financial statements:
1. Misstatement of Revenue and Expenses
Payment processors generally send you a net deposit after deducting their processing fee.
If you code the net deposit directly to Sales, your P&L will understate your total top-line revenue and omit the merchant processing fee you paid from expenses. To understand the true sales amount and exactly how much you are paying to the payment processor, both numbers need to be recorded accurately, not netted together.
2. Month-End Timing Mismatches
There are bookkeepers who record net deposits to Sales and do a workaround to adjust the sales number by recording a journal entry to bring the sales up and recording the fee. That will create accurate sales and expense numbers.
However, payment processor deposits rarely align perfectly with the calendar month. For example, a customer payment received in Stripe on September 29th may not be deposited into your bank account until early October.
The sales should still be recorded in September, not in October.
By using a clearing account, your financial statements reflect accurate sales for that specific month without distorting your bank balance (i.e., if sales are recorded directly against the bank account in September before the deposit arrives, the bank account now holds a balance including future deposits).
How to Set Up & Use a Clearing Account in QBO
First, create the account by adding a new account in the Chart of Accounts.
- Account Name: I recommend naming it [Processor Name] Clearing (e.g. Stripe Clearing, Square Clearing, PayPal Clearing).
- Account Type: Select either Bank/Checking or Other Current Assets.
How Money Flows Through a Clearing Account
There are three steps in the workflow:
1. Money In (Gross Customer Payment)
When a customer pays, the gross sales amount enters the clearing account:
Dr. Clearing Account
Cr. Sales Revenue
2. Money Out
When the payment processor transfers the payout into your business checking account:
Dr. Checking Account
Cr. Clearing Account
In the QBO Bank Feed, you can record this incoming deposit by selecting the Clearing account as the category. Alternatively, you can create a Transfer from the Clearing account to your Checking account.
3. Merchant Processing Fee Expense
To clear out the remaining fee balance in the clearing account, record the processing fee:
Dr. Merchant Account Fee Expense
Cr. Clearing Account
How to Record Sales in Clearing Account (Two Common Methods)
Depending on where your customer invoices or daily receipts originate, you can use one of the following two workflows.
Method A: Invoices Created Outside QBO (High-Volume Sales)
If sales and invoices are generated directly inside the merchant platform (e.g. Stripe, Shopify) rather than QBO:
At month-end (or daily/weekly depending on the volume), take the summary report from your payment processor and create a journal entry:
Dr. Clearing account
Dr. Merchant Account Fee
Cr. Sales
(Cr. Sales Tax and any other transactions as applicable)
As payout deposits arrive in your QBO Bank Feed, categorize them directly to your Clearing Account.
Method B: Invoices Created Inside QuickBooks Online (not through payment processor)
If invoices are sent directly from QuickBooks to customers, the sales are automatically recorded already in QBO.
When receiving a payment on an invoice, go to Receive Payment and select your Clearing account in the “Deposit to” field. This records the full gross payment amount into the clearing account.
To account for the processor fee, create an Expense transaction in QBO.
- Payment Account: Select Clearing Account
- Category: Merchant Account Fee Expense
As payout deposits arrive in your QBO Bank Feed, categorize them directly to your Clearing Account.
How to Reconcile a Clearing Account at Month-End
Just like your bank or credit card accounts, the Clearing account balance needs to be reconciled at month-end.
In a payment processor account, there will often be customer payments received near the end of the month that have not yet been transferred to your bank account. That pending payout amount (gross sales minus fees) becomes the ending balance in your clearing account.
Your payment processor’s monthly statement balance may not perfectly match the ending balance in QBO. Why? A transfer initiated by the processor on the last day of the month will not reach your checking account until the 1st or 2nd of the following month. If you record the transfer in the current month, it will be a reconciling item in the bank account. If you prefer to keep the pending transfer in the Clearing account balance, calculate the balance by taking the processor’s statement balance + any pending transfers.
In the Reconcile section of QBO, enter the balance identified from the step above and the date as the last day of the month.
Select all cleared gross sales, fees, and bank transfers for the month. The difference should equal $0.00.