Sometimes there are transactional classes which benefit from the use of clearing accounts. This article is an effort to show two examples where this technique works well, and some scenarios where it would not work well at all. All are derived from “real-world” cases.
WHAT IS A CLEARING ACCOUNT
The term, as used here, is a current liability account which focuses on one source of costs. The account is linked to a single payee (vendor or internal user) and has costs flow in via the standard expense model, but reimbursements flow out via payments of arbitrary amount. This makes the account functionally identical to a credit card.
When we post a charge on a credit card, the core characteristics include:
The funding (posting to the general ledger) occurs immediately and the expense is therefore “realized”.
If we take the set of N expenses for a vendor and “pay” them via a (notional) check or credit card that posts to a specific liability account dedicated to this vendor alone, we can state categorically that the current value in this account is what we owe this vendor.
Then we can make a decision to pay down an arbitrary amount on the vendor balance without having to link to specific expenses. The advantages include:
CASE 1: HIGH VOLUME SHIPPING ACCOUNT
The business is making a large number of shipments using a preferred vendor. Invoices come in weekly with 10-30 shipments on each one.
PROBLEM: If we are paying these invoices in the standard expense check model, the check has to be constructed with 10-30 lines, each with the proper expense code and payment amount. It's laborious.
SOLUTION: Use of a clearing account and a notional credit card.
When the invoice comes in, the processing is divided into two steps which do not have to happen at the same time.
Steps 1 and 2 never have to happen at the same time and they self-correct.
CASE 2: SALES COMMISSIONS ACCOUNT
Percentage-based commissions are a special problem because the amount owed to the sales-rep will change depending on discounts claimed, external costs, restocking, warranties, and myriad other events. If you make commission payments constructed from specific sales, you create a nightmare scenario of constant revisions and/or adjustment transactions. It's far better to decouple commissions from payments.
PROBLEM: paying directly from commissions expenses requires restating the value if the job costs change.
SOLUTION: Use of a clearing account and a notional credit card.
Payments to the sales representative are simple liability checks of arbitrary amounts that post to reduce the clearing account balance. Clawbacks, etc. are not necessary here because the inputs are being adjusted at the expense level. The account is essentially self-correcting.
AVOID INVENTORY IN MOST CASES (CASH-BASIS ACCOUNTING ONLY)
Consider a case with a high-balance vendor, but the specific nature of the items being purchased is that the associated costs are flowing to inventory.
In this case, use of a clearing account is not helpful. Your costs will flow to inventory immediately, instead of when you actually pay for the items (assuming your company is not using accrual-basis accounting which has many similar disadvantages). You're better off letting these costs “float” (not post) until you actually pay them.
On the other hand, if you want your inventory values to be firm (not subject to constant revision), you might want to use a clearing account because the costs can be posted in here (without regard to a specific vendor) and paid down from here as cash and motivation dictates.
CONCLUSIONS
In summary, you can realize advantages in the decoupling of inputs and outputs using a clearing account exactly as you manage many other costs using credit lines. The technique does not depend on cash-basis accounting, but can derive most of the (few) advantages of accrual basis without incurring the (possibly significant) tax disadvantages.