Definition
The clearing cycle is the end-to-end process that a payment, typically made by cheque, undergoes from the moment it is deposited until the funds are fully accessible by the payee. This process involves several steps and different timelines when the cheque is considered “cleared for value” and “cleared for withdrawal.”
Phases of Clearing Cycle
- Cleared for Value: This occurs roughly two working days after the cheque is deposited. At this point, the cheque is considered cleared for value and impacts the payer’s account.
- Cleared for Withdrawal: This takes an additional two working days where the cheque is cleared for withdrawal, meaning the payee can now withdraw or use the funds.
- Cleared for Fate: Overall, it might take six working days before the cheque is cleared for fate, confirming that it has been fully processed through the banking system, and there are no returns or reversals.
Examples
Example 1: Personal Cheque Clearance
- Jane deposits a cheque of $500 into her account on Monday.
- By Wednesday (two working days), her bank reflects the cheque as cleared for value.
- By Friday, she can withdraw the full amount as the cheque is cleared for withdrawal.
- The following week Tuesday marks the completion of the whole cycle, clearing it for fate.
Example 2: Business Transaction
- A supplier deposits a business cheque of $10,000 on Thursday.
- By the next Monday (two working days), the cheque is reflected in his account as cleared for value.
- By Wednesday, he can use the funds, as they are cleared for withdrawal.
- By the next Thursday, the cheque is fully processed and cleared for fate.
Frequently Asked Questions (FAQs)
What impacts the clearing time of a cheque?
Several factors, including the bank’s processing times, whether the cheque is drawn on a local or out-of-area bank, and the type of cheque, can influence the clearing time.
Why is there a difference between cleared for value and cleared for withdrawal?
Cleared for value means the cheque amount is reflected in the account, affecting balances but not necessarily usable. Cleared for withdrawal indicates the payee can now use or withdraw the cleared funds after additional checks for security and sufficiency of the payer’s account.
What is a ‘Cleared for Fate’ status?
Cleared for fate means the cheque has passed completely through the banking system, and there are no further risks of reversal or bouncing, ensuring the payee can permanently retain the funds.
Can the clearing cycle be faster in some cases?
Yes, some banks offer faster cheque clearing processes or digital cheque clearance systems the reduce the clearing time.
What if a cheque bounces during the clearing cycle?
If a cheque is dishonored or “bounces,” the bank will reverse the value credited to the payee’s account, and fees may apply.
Related Terms and Definitions
Cheque
A written order directing a bank to pay a specified sum from the drawer’s account to the payee.
Dishonor of Cheque
Occurs when a bank refuses to pay the cheque amount due to insufficient funds, signature mismatch, or other reasons.
Endorsement
A signature or statement of approval on the back of a cheque allows for assignment to another party.
Clearing House
An intermediary system used by banks to settle payments and cheques from other financial institutions.
Online Resources
- The Balance - Understanding the Cheque Clearing Cycle
- Federal Reserve Bank - Check Clearing System
- Money Advice Service - Cheques: When Yours Might Clear
Suggested Books for Further Study
- “Accounting Fundamentals for Beginners” by Warren Ruppel
- “Mastering the Basics of Accounting” by Pola Sarmento
- “Finance and Accounting for Nonfinancial Managers” by William G. Droms and Jay O. Wright
- “Bookkeeping Essentials: How to Succeed as a Bookkeeper” by Steven M. Bragg
Accounting Basics: “Clearing Cycle” Fundamentals Quiz
Thank you for reading about the intricate procedures behind the clearing cycle. Keep pursuing knowledge to stay ahead in your accounting and finance endeavors!
