A transaction in QuickBooks cannot post to an accounts receivable account and to an accounts payable account within the same entry, and the program will reject any entry that attempts to do so. This restriction applies to journal entries and this restriction applies to the other transaction types in the program as well. A business that needs to move a balance out of an accounts receivable account and into an accounts payable account must therefore move that balance through a third account, and the account that is used for this purpose is generally called a clearing account.
Key Takeaways
- QuickBooks blocks any transaction that posts directly to both an accounts receivable and an accounts payable account.
- Common triggers include applying customer credits to vendor balances, intercompany transfers, reclassifying entries, and refunds tied to vendor overpayments.
- The workaround is a clearing account set up under Bank or Other Current Assets, sometimes called a wash or suspense account.
- Moving a balance from AR to AP takes two journal entries, first debiting the clearing account and crediting AR, then debiting AP and crediting clearing.
- After both entries post, the clearing account should show a zero balance, and the extra steps add time and raise the chance of errors.
Why QuickBooks Requires a Clearing Account
Accounts receivable and accounts payable are kept apart from one another in a properly maintained set of books. The amounts that customers owe to the business are recorded in accounts receivable. The amounts that the business owes to its vendors are recorded in accounts payable. Accounts receivable is reported separately from accounts payable, and accounts receivable is not intended to be offset against accounts payable, and QuickBooks enforces that separation at the point at which a transaction is entered.
The restriction is applied even in cases where the same outside party is both a customer of the business and a vendor to the business. That situation occurs more often than might be expected, and it is the situation in which most users encounter the restriction for the first time.
A customer credit cannot be applied against a vendor balance. Where a company owes money to the business on an invoice, and the business owes money to that same company on a bill, the reasonable treatment is to offset the amount of the invoice against the amount of the bill. QuickBooks does not permit the credit to be applied to the bill directly.
An intercompany transfer is subject to the same restriction. A business that operates more than one entity will frequently have one entity issuing an invoice to a second entity while also owing money to that same second entity on a separate matter. The amount of the invoice cannot be netted against the amount that is owed without an intermediate account placed between them.
A reclassification is subject to the restriction as well. An entry that was recorded against accounts receivable is sometimes found at a later date to belong in accounts payable, and an entry that was recorded against accounts payable is sometimes found at a later date to belong in accounts receivable. Correcting an entry of either kind requires the same workaround that is required for any other transfer between accounts receivable and accounts payable.
A refund that arises from a vendor overpayment is the remaining case, in the situation where that vendor is also a customer of the business. The balance cannot be moved out of accounts payable and into accounts receivable in a single step.
The Clearing Account Workaround
A clearing account is an ordinary account that holds a balance on a temporary basis while that balance is being moved from one side of the books to the other side of the books. A clearing account is also called a wash account and a clearing account is also called a suspense account, and all three of those names refer to the same thing.
The account is created in QuickBooks under the Bank category or under the Other Current Assets category. The name that is given to the account is not significant to the program. Clearing Account and Intercompany Clearing are both names that are commonly used.
Moving a balance out of accounts receivable requires two journal entries rather than one. In the first journal entry, the clearing account is debited and accounts receivable is credited. In the second journal entry, accounts payable is debited and the clearing account is credited.
Once both journal entries have been posted, the clearing account should hold a balance of zero. A balance that remains in the clearing account after both entries have been posted indicates that one of the two journal entries was never completed, or that the two journal entries were posted for amounts that do not match.
The Downsides of Using a Clearing Account
The workaround produces the correct result in the books. The workaround also creates several problems that a direct transaction between accounts receivable and accounts payable would not have created.
Two journal entries must be prepared, reviewed and posted in a case where a single transaction would otherwise have been sufficient. That additional work is incurred every time the situation arises.
The additional entry also creates additional room for error. The failure that occurs most frequently is a first journal entry that is posted without the matching second journal entry. Where that happens, a balance is left stranded in the clearing account, and both accounts payable and accounts receivable remain misstated until the stranded balance is identified.
The procedure also places a significant demand on the person who is keeping the books. Business owners who maintain their own records without formal accounting training are the group that struggles with the procedure most often, and they are also the group that is least likely to identify the problem when the procedure has not been completed correctly.
The reconciliation work is the remaining cost. A clearing account is expected to hold a balance of zero, and so any balance that appears in a clearing account must be investigated. That investigation becomes one more recurring task at every period close.
Why QuickBooks Should Address This Issue
Other accounting platforms handle transactions of this kind without requiring an intermediate account. The separation between accounts receivable and accounts payable is preserved in the underlying records, and the user is still permitted to enter the transaction in the form in which it actually occurred.
A linking feature would resolve the problem inside QuickBooks. An accounts receivable transaction would be connected to an accounts payable transaction, and the offsetting entries would be generated by the program in the background. An automated offset would also resolve it, in which the program identifies a customer and a vendor as the same party and then proposes the netting entry.
A Smarter Alternative: GlassJar Accounting Software
GlassJar handles these transactions directly, and no clearing account is involved. A customer credit is applied against a vendor balance. A balance is transferred between entities. A transaction that was recorded against the wrong account is reassigned rather than reversed and reposted.
The separation between accounts receivable and accounts payable is still maintained in the ledger, and so the reporting comes out correct. What changes is the number of steps it takes you to get there. See what GlassJar can do for your books.
