What Is Undeposited Funds? 🤑
Undeposited Funds is a temporary holding account in QuickBooks where you can group payments you’ve received before you physically take them to the bank. Think of it as a virtual shoebox or drawer for your checks, cash, and credit card receipts. The goal is to ensure that the money you record in QuickBooks matches the exact deposit amount on your bank statement. It’s a key part of maintaining accurate books and making bank reconciliation a breeze.
Why Use Undeposited Funds?
The primary reason to use Undeposited Funds is to prevent discrepancies between your QuickBooks records and your bank statements.
Matching Bank Deposits: When you receive multiple payments (e.g., three checks for $100, $200, and $50), you’ll likely deposit them all at once. If you don’t use Undeposited Funds, QuickBooks will show three separate deposits of $100, $200, and $50. Your bank statement, however, will show a single deposit of $350. This mismatch makes bank reconciliation difficult. Undeposited Funds allows you to group these three payments into a single deposit of $350, perfectly matching your bank statement.
Accuracy: It ensures your balance sheet accurately reflects cash on hand (in the Undeposited Funds account) and cash in the bank.
Clear Audit Trail: It provides a clear and traceable path from a customer’s payment to its final destination in your bank account.
How Does It Work? The Step-by-Step Flow
The Undeposited Funds process is a two-step system.
Step 1: Receiving the Payment
When a customer pays you, you must record that payment in QuickBooks. Instead of depositing the money directly into your checking account, you’ll first place it into the Undeposited Funds account.
For QuickBooks Desktop:
From the Customers menu, select Receive Payments.
Choose the customer and the invoice they’re paying.
Enter the payment amount.
In the Deposit To field, make sure Undeposited Funds is selected.
Click Save & Close.
For QuickBooks Online:
From the + New menu, select Receive Payment.
Choose the customer and the invoice.
Enter the payment details.
In the Deposit To field, select Undeposited Funds.
Click Save and close.
At this point, the invoice is marked as paid, but the money hasn’t yet hit your bank account in QuickBooks. The funds are now sitting in the Undeposited Funds account on your balance sheet.
Step 2: Depositing the Funds
Once you physically take the payments to the bank, you’ll record this deposit in QuickBooks, moving the funds from Undeposited Funds to your actual bank account.
For QuickBooks Desktop:
Go to the Banking menu and select Make Deposits.
The Payments to Deposit window will pop up, showing all the payments you’ve put into Undeposited Funds.
Select all the payments you are physically depositing together.
Click OK.
The Make Deposits window will open. Verify that the total deposit amount matches your bank slip.
Select the correct bank account where the money is being deposited.
Click Save & Close.
For QuickBooks Online:
From the + New menu, select Bank Deposit.
The screen will show all the payments currently in Undeposited Funds.
Select all the payments that you are depositing together.
Choose the bank account where the deposit is being made.
The total at the top will automatically update as you select payments.
Click Save and close.
After this step, the money leaves the Undeposited Funds account and appears in your bank account, ready to be reconciled with your bank statement.
Common Questions and Troubleshooting
My bank statement says I have a deposit, but I don’t see it in my QuickBooks bank register. What happened?
You likely completed Step 1 (receiving the payment) but forgot Step 2 (making the deposit). The money is still in your Undeposited Funds account. Go to Make Deposits and deposit the funds into the correct bank account.
I’m not using the Undeposited Funds feature. Why is my bank account wrong?
If you’re not using Undeposited Funds, you’re likely depositing payments directly into your bank account as you receive them. This works for simple scenarios, like receiving a single payment via a direct bank transfer. However, for multiple checks or cash payments deposited together, this method will lead to a reconciliation nightmare because your bank statement won’t match the individual transactions in QuickBooks.
How do I view the Undeposited Funds account balance?
You can see the balance of Undeposited Funds on your Balance Sheet report. The amount shown here represents the total value of payments you’ve received but haven’t yet deposited into a bank account.
What if I deposit cash and checks together with a credit card payment?
You can group all these payment types into a single deposit. When you go to Make Deposits, simply select all the payments you’re depositing, regardless of the payment method (cash, check, or credit card). QuickBooks will create a single, combined deposit entry.
Credit card payments processed via QuickBooks Payments are often handled automatically. The system will create the sales receipt and the bank deposit entry for you, often bypassing the need for Undeposited Funds. However, if you process payments outside of QuickBooks (e.g., through a third-party POS system) and then manually enter them, you will need to use the Undeposited Funds feature to correctly match the batch deposit from your payment processor to your bank statement.
Analogy: The Shoebox Method 👟
Imagine you have a shoebox where you keep all the money you receive from customers—checks, cash, and credit card slips. When you get a payment, you put it in the shoebox. This is Step 1 (Receiving the Payment and placing it in Undeposited Funds).
At the end of the day or week, you take all the contents of the shoebox to the bank. This is Step 2 (Making the Deposit). The single deposit slip from the bank matches the total amount of money you took out of the shoebox.
The Undeposited Funds account is your virtual shoebox. It holds the money until you can make a single, matching deposit entry.
Conclusion
The Undeposited Funds feature is a cornerstone of accurate bookkeeping in QuickBooks. While it might seem like an extra step, it’s a critical process that ensures your digital books align perfectly with your physical bank statements. By using it correctly, you’ll save yourself countless hours of troubleshooting during bank reconciliation and gain a more accurate, real-time picture of your business’s financial health. Don’t skip this crucial step—it’s the key to clean and organized accounting.