Clearing Account
What is a Clearing Account?
A clearing account is a temporary account used when transferring information from one place to another.
![cla1](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla1.jpg)
How it Works
During the accounting period, you record income and expenses.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla2.jpg)
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla3.jpg)
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla4.jpg)
An income summary account is a clearing account used to clear out the income and expense accounts.
![cla5](https://seeaccountingnow.online/wp-content/uploads/2021/06/cla5.jpg)
Why Close Out the Accounts
The income statement is a summary of income and expense transactions for the current period, only.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla6.jpg)
Once the report is complete, the income and expense accounts have done their job.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla7.jpg)
Income and expense accounts are classified as temporary accounts.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla8.jpg)
So once the report is prepared, they need to be cleared out.
![cla5](https://seeaccountingnow.online/wp-content/uploads/2021/06/cla5.jpg)
This will leave them empty, ready for the coming period’s income and expenses.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla10.jpg)
Preparing an Income Summary Account
To prepare an income summary account, you transfer information from the income and expense accounts.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla11.jpg)
First, you transfer expenses to the clearing account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla12.jpg)
Then you transfer income to the account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla13.jpg)
After this, you find the account’s balance, which will show profit or loss for the period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla14.jpg)
You transfer this profit or loss to retained earnings.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla15.jpg)
The clearing account is also a temporary account, its only function being to transfer information from one place to another.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla16.jpg)
So by transferring its balance, you will close out this account, as well.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cla17.jpg)
© R.J. Hickman 2020