A payroll clearing account is a general ledger account that is normally set up in the asset section of the balance sheet, says John W. Jay, MBA, who has written several books and numerous essays about accounting. Jay adds that the purpose of a payroll clearing account is:
"... to reconcile all the net payroll checks paid to employees during an accounting period with a general journal entry that summarizes the total of all the net payroll checks. If a discrepancy occurs, the difference will remain in the payroll clearing account. This difference can then be researched to find the cause of the discrepancy."
A journal entry to a payroll clearing account, then, is actually a general ledger entry that summarizes the total expenses that are included in all net payroll checks. In other words, this is an entry that helps you determine exactly how much you are paying out in payroll in a given period. The "clearing" in a payroll clearing account means that you are using this accounting method to "clear" revenues and expenses, such as the total payroll you pay out during a given period, and reconcile any potential errors you may have in determining payroll.
A payroll clearing account is a temporary, zero-balance account. That is, once you've paid your payroll, the journal entry will "zero out" leaving no balance. JSN & Associates, a San Diego-area tax and accounting firm, gives this example of a journal entry to a payroll clearing account:
General Journal Recording
- Wages $17,538.50
- Employer Taxes $ 2,703.93
- Workers Comp $ 952.35
- Payroll processing fees $ 56
- Clearing Account $ 21,250.78
Note that all of your payroll expenses, wages, taxes, workers comp, and so on, are listed on the left side of your ledger, as a debit. And all of these payroll expenses add up to $21,250.78. You then list the total of all of your payroll expenses, $21,250.78, as a credit in your clearing account. Once you, or your payroll-processing service, pays that amount, the payroll section of your payroll clearing account will “zero out” or be “cleared,” hence, the term “clearing account."
Clearing accounts assist in reconciling transactions that come from or go to various sources, says Bookkeeping Essentials, which explains the process as follows:
"I often used a payroll clearing account where I code the actual payroll entry to the clearing account and once the check is issued, the offsetting entry is to the payroll clearing account rather than all the regular payroll entries. I do this because payroll can be messy. It makes my bank reconciliation easier especially if payroll correcting entries are necessary. A clearing account is balanced when all the entries come to zero."
Payroll can be a messy and mistake-ridden process. You have to calculate withholding taxes for employees and understand all the federal and state rules associated with those taxes, says Day, the accounting writer, adding:
"If you don’t stay on top of the rules, which can change from year to year, you risk miscalculating the taxes and/or missing reporting deadlines."
The clearing account gives you a chance to avoid those errors: You simply list all of the required parts of payroll, such as taxes, withholdings, and so on, in the debit column, then you total all of your payroll expenses and list that as a single-entry asset in your payroll clearing account. In other words, a payroll clearing account entry is a way to help you list all of your payroll expenses in one place, followed by a payroll clearing account entry. Once you've paid your payroll, you zero out the entries, and you're finished, all neat and tidy.