What is a PayPal clearing account?
A clearing account is used to track undeposited funds or funds in transit from your payment provider to your checking account.
Similar to a suspense account or holding account, clearing accounts serve as a temporary place to record entries that are waiting to be categorized. The clearing account must be set up as a Current Asset account in the accounting system.
When using a clearing account for PayPal, these accounts are typically used for one of two purposes:
1. Reconciling data points
The clearing account is set up to receive postings from two different data sources, which should net to zero. The debits should offset the credits, resulting in a NIL or timing balance at month-end.
Example 1: Shopify PayPal clearing account
All expected deposits from sales processed within Shopify are debited to this account, while all bank deposits received by PayPal are credited to it. At the end of each period, the net balance should be zero (or an immaterial balance if multiple currencies are involved).
Example 2: Reserves withheld and released
PayPal may hold back an expected deposit for a set period to cover potential refund requests, which is referred to as a reserve withheld. After the set period, the funds are released, known as a reserve release. The net balance at the end of each period should either be zero or reflect a timing issue (i.e., funds temporarily withheld and pending release).
2. Categorizing transactions
The clearing account is set up to receive postings that require further categorization.
Example: Payments sent and received
You may designate a clearing account for each category to facilitate further decisions about transaction treatment:
Payments sent: These transactions might represent payments to bills already recorded in your accounting system. In this case, you would post the payments to a PayPal Payments Sent account and then create a "payment" from this account to the supplier bill to clear it.
Payments received (Non-Shopify): While uncommon, payments received in PayPal that are not Shopify-related can also be posted to a clearing account. This allows you to review the circumstances and determine the appropriate way to record them in your accounting ledger.
Month-End Review of Clearing Accounts
Clearing accounts should be reviewed at month-end to understand the ending balance. These accounts must be cleared back to zero or to a balance that represents a timing issue only.