A clearing account is an account used to temporarily accumulate funds that will later be transferred to another account. Clearing accounts are used for a variety of purposes, from payroll processing to mortgage servicing.
An escrow account, which is a kind of clearing account, is used for all kinds of business transactions. In mortgage servicing, clearing accounts called mortgage escrows are used to protect both the buyer and the seller. Money is not paid by the buyer directly to the seller but to an escrow account. The money is held there until all the stipulations of the contract has been satisfied by the seller. With mortgage escrows, these payments often include monthly payments as well as the insurance and property tax. This is beneficial since buyers can choose not to pay their annual property tax as a lump sum.
Clearing accounts are often used by large companies in payroll processing. Companies create a payroll clearing account (PCA). They transfer money from their main bank account to the PCA right before payday. Employee checks are then cleared against the PCA balance instead of the company’s main bank account. Once all employees have cashed their checks, the PCA’s balance goes back to zero. PCAs are advantageous for companies because it keeps their main bank accounts secure. It also makes it easier to check payroll transactions since they can all be seen in the PCA bank statements.