Cleared balance means the amount ready to use and withdrawn by the account holder. Unlike the available balance, account holders can use this balance as and when they want.
Let us discuss what cleared balance is and how it works.
Cleared Balance – Definition
Cleared balance refers to any deposited checks or cash that has been processed and is available immediately for withdrawal or use by an account holder.
It differs from the account balance in a bank account, balance sheet account, or any other type of account.
The processing bank or institute may take time to process and confirm the deposited instrument before it becomes available for withdrawal.
As the name suggests, clearing the processing entity verifies balance. It may refer to the account balance for a bank account, trading account, or ledger account.
By definition, cleared balance is a balance available for any type of transaction for the account holder.
These transactions can include check deposits, electronic funds transfers, wire transfers, and cash deposits.
How Does Cleared Balance Work?
Cleared funds are commonly referred to as bank account deposits. When an individual or a business deposits a check, payment order, letter of credit, or any other instrument, it may take time to clear.
If the depositor’s and payer’s bank accounts are in the same bank, the clearing process may take a few hours, and the instrument can be cleared within the same day.
However, if these banks and institutes differ, it may take a few days.
The receiving bank sends the instrument to other banks for verification. The verification process includes signature authorization, balance confirmation, and other formalities.
Once the payer’s bank verifies these details, the balance will be deducted from the payer’s bank account. Then, it transfers the funds to the receiver’s clearing system.
The receiver’s bank transfers that amount to the bank account once it receives these funds. Depending on the payment clearance system, this process may take a few hours or days.
In many cases, a third-party payment clearing house facilitates the process. This institute acts as a facilitator institute and helps both sides to clear the payment instruments easily.
For international bank instruments, there may be more than one intermediary institute involved in the clearing process. So, it may take longer to clear an international instrument than a domestic one.
Suppose an account holder John Right receives a bank check for $1,000. Suppose the check, the payer, and the receiver’s bank accounts differ.
When John Right deposits the check into the bank account, the account will show an increased balance of $1,000. However, this additional amount will not be available for withdrawal immediately.
Once the bank clears the check through the clearance process, the additional $1,000 will reflect in John Right’s bank account.
If the payer’s account refuses the check for some reason, it will count as an uncleared balance, and the depositor will not be available to withdraw that amount.
Cleared Balance and Clearing Account
Banks use clearing accounts to clear deposited instruments like checks, payment orders, and letters of credit.
When depositors deposit an instrument, the bank creates a clearing balance for that amount. This amount remains in the clearing until the deposited instrument is cleared from the payer’s bank.
After clearing the instrument, the amount is transferred from the clearing account to the depositor’s bank account.
The purpose of the clearing account is to maintain an intermediary handling balance until the deposited instruments are cleared.
A bank would use a clearing account to collect all deposited checks and other instruments. So, it will show a collective under-clearance balance for its customers.
Cleared Balance in Trading Accounts
The concept of cleared balance is commonly linked to bank accounts. However, it may refer to cleared balances in trading accounts as well.
When trades deposit money into their accounts, they use leverage margins to make trade moves.
Brokers require a minimum account balance as a margin that can be used by the trader for trading but cannot be withdrawn without the prior consent of the broker.
A cleared balance will be the total earnings or otherwise available balance for the trader’s use. This balance will include broker charges, pending payments, and margin requirements.
In practice, cleared balance for trading accounts works similarly to that of a bank account cleared balance.
Both accounts provide a cushion of safety for the institute before the deposited amount is made available to the depositor/trader.
Cleared Balance Vs. Available Balance
The available balance in a bank account is often different from the cleared balance. It includes both cleared and uncleared balances.
When an account holder deposits a check or an instrument that requires clearing, the amount of that instrument reflects in the account.
The available balance increases immediately but the account holder can only use cleared balance.
If the payer’s bank returns the check for any reason, the depositor’s bank will reverse the earlier transaction resulting in a reduced balance for the same amount.
Conversely, if the check is cleared, the available balance will now be cleared balance.
Therefore, the available balance becomes cleared balance once it goes through the formal process of balance clearing.
Why Does Un-Cleared Balance Exist?
Un-cleared balances exist for different reasons in the banking and trading systems.
Brokers use these balances as a margin of safety. However, a trader deposits these funds, the broker restricts its withdrawal usage until all pending payments or requirements are cleared.
Similarly, banks use the clearing system to confirm and verify different types of payment instruments.
For instance, once an account holder initiates an online payment transfer, the bank will immediately verify the applicant’s identity.
The amount will be deducted from the payer’s account immediately. However, if the bank has to transfer that amount to another bank, it takes time to verify the receiver’s details.
The request is forwarded to the receiver’s bank to verify these details. Until confirmation, the deducted balance from the payer’s account remains in the clearing account.
The whole process may take a few minutes though. However, until then the payer’s bank cannot use that amount or transfer it to the receiver’s account either.
The use of a clearing system and un-cleared balance allows banks easy reconciliation. It avoids any hasty funds transfers and ensures that the right person or entity receives these funds.