What Are Undeposited Funds In Quickbooks?

For businesses, managing finances is a critical aspect of maintaining a healthy and prosperous operation. From recording payments accurately to streamlining the reconciliation process, every step counts towards financial success. Today, businesses use advanced tools and software to simplify their financial management tasks, and one such popular solution is QuickBooks. 

QuickBooks offers a comprehensive suite of features that cater to the diverse needs of businesses, allowing them to efficiently track income and expenses, generate invoices, create journal entries and manage cash flow. Within the realm of QuickBooks, there exists a concept that holds significant importance for maintaining accurate financial records: Undeposited Funds.

What’s the Undeposited Funds Account?

The Undeposited Funds account in QuickBooks acts as a temporary holding area for payments until they are physically deposited into a bank account. It allows businesses to mirror the process of combining payments into a single deposit that banks typically perform. By utilizing this account, businesses can maintain accurate records and ensure consistency between QuickBooks and their real-life banking transactions.

How does it work?

The process of using Undeposited Funds is simple and intuitive. When a business receives payments from customers, QuickBooks provides two options: deposit the funds directly into a bank account or allocate them to the Undeposited Funds account. By selecting the latter, the payments are held in the Undeposited Funds account until they are ready to be deposited into a bank account.

What are the benefits of Undeposited Funds?

Let’s explore the key advantages of utilizing Undeposited Funds:

• Accuracy in Recording Transactions

Undeposited funds provide businesses with a systematic approach to recording payments. By accumulating all payments in this account, each transaction can be accurately reflected in QuickBooks before proceeding with the deposit process. This helps maintain a clear and reliable audit trail, ensuring that the financial records align with the actual payments received.

• Enhanced Reconciliation

One of the significant benefits of QuickBooks when using Undeposited Funds is the streamlined reconciliation process. When it’s time to deposit funds into the bank account, businesses can match the deposit transactions in QuickBooks with the corresponding entries on the bank statement. This ensures consistency and accuracy in financial records, reducing the risk of errors during the reconciliation process.

• Grouping Payments

Undeposited funds allow businesses to group payments together conveniently, especially when dealing with multiple payments from different customers or for various invoices. Utilizing this feature enables them to consolidate these payments into a single deposit, which is particularly helpful for reconciling in QuickBooks. This consolidation not only simplifies the reconciliation process but also provides a clearer overview of the business’s cash flow. In addition, it eliminates the need to track individual deposits for each payment received, saving time and effort.

• Efficient Handling of Partial Payments and Overpayments

Undeposited funds simplify the handling of partial payments and overpayments. In cases where customers make partial payments, businesses can record the full payment amount under the “Received” column in QuickBooks. The accounting software automatically generates a credit for the remaining balance, which can be applied to future invoices or refunded to the customer as necessary. 

• Flexibility in Timing of Deposits

Undeposited funds offer businesses flexibility in timing their deposits. By holding funds in this account, businesses have the opportunity to review and verify all payments before initiating the deposit process. This allows for better control over cash flow and ensures that all necessary adjustments or corrections are made before the funds are deposited into the bank account.

• Improved Financial Reporting

By accurately recording payments and maintaining consistency between QuickBooks records and bank statements, businesses can generate reliable financial reports. This enhances decision-making processes, helps monitor cash flow effectively, and provides a comprehensive view of the business’s financial health, including the state of Retained Earnings in QuickBooks.

How To Use The Undeposited Funds Account In Quickbooks Online?

Using the Undeposited Funds account in QuickBooks Online helps you manage and organize your incoming payments before you deposit them into your bank account. Here are the steps to effectively use the Undeposited Funds account in QuickBooks Online:

Step 1: Put payments into the Undeposited Funds account

The Undeposited Funds account acts as a temporary holding area for payments before they are deposited into a bank account. When combining payments, you have the flexibility to choose the specific account in QuickBooks where the deposit will be recorded.

Here are steps you can follow depending upon how you process the payment and enter the transactions into Quickbooks:

• If you downloaded transactions from your banks and credit cards:

When you connect your bank and credit card accounts, QuickBooks will automatically download all your transactions, eliminating the need for you to manually combine them or use Undeposited Funds. QuickBooks already has the necessary information from your bank, so all you have to do is categorize the downloaded transactions.

• If you process transactions with QuickBooks Payments:

Invoice payments processed with QuickBooks Payments are automatically managed by QuickBooks, eliminating the need for manual handling on your part. However, if you need to consolidate payments that were processed externally to QuickBooks Payments, follow the steps below to combine them:

• Click on the “+ New” button.
• Select “Receive Payment.”
• Choose the customer from the Customer dropdown.
• Select the checkbox for the invoice for which you are receiving payments.
• From the “Deposit to” dropdown menu, choose “Undeposited Funds.”
• Complete the remaining fields in the form.
• Select either “Save and Send,” “Save and New,” or “Save and Close” to proceed.

If you process payments with sales receipts outside of QuickBooks:

• Select “+ New” in QuickBooks Online.
• Choose “Sales receipt.”
• Select the customer from the Customer dropdown.
• From the “Deposit to” dropdown, select “Undeposited Funds.”
• Fill out the rest of the sales receipt form.
• Select “Save and send,” “Save and new,” or “Save and close.”

Note: It’s important to always review the “Deposit to” field to ensure you know the destination of your payments. If your bank records a single payment as a separate deposit, there is no need to combine it with other transactions. In such cases, you can directly allocate the payment to an appropriate account within QuickBooks, bypassing the use of Undeposited Funds.

Step 2: Make a bank deposit

Once you have your deposit slip ready, you can easily record a bank deposit and consolidate the payments within QuickBooks. All the payments residing in the Undeposited Funds account will automatically appear in the Bank Deposit window, streamlining the process for you.

Step 3: Review your Undeposited Funds account

• Go to “Bookkeeping” or “Accounting” in QuickBooks Online, then select “Chart of accounts.”
• Find the Undeposited Funds account on the list.
• Select “View register” to review and clear out any payments waiting to be deposited.

By following these steps, you can effectively utilize the Undeposited Funds account in QuickBooks Online to track and manage your payments until they are ready for physical deposit into your bank account. 

QuickBooks Desktop for Undeposited Funds Account

To use the Undeposited Funds account of QuickBooks on your Desktop, follow these steps:

Step 1: Put payments into the Undeposited Funds account

If you utilize QuickBooks Payments for Desktop for processing invoice payments, it automatically handles everything for you. You don’t need to combine payments or move them to an account.

For invoice payments processed outside of QuickBooks:

QuickBooks automatically puts the received payment for an invoice into the Undeposited Funds account. Proceed to Step 2 to deposit the payments.

For sales receipts generated for payments processed outside of QuickBooks:

QuickBooks, by default, puts the sales receipt payments into the Undeposited Funds account. Simply generate a sales receipt, and the rest of the things will be handled by QuickBooks.

If you prefer to select a different account for your payments, follow these steps:

• Go to the Edit menu and choose Preferences.
• Choose Payments from the list and go to the Company Preferences tab.
• Uncheck the “Use Undeposited Funds as a default deposit to account” checkbox.
• Click OK.

Now, each time you create a sales receipt, you can choose Undeposited Funds or another account.

Here’s how to create a sales receipt and select the Undeposited Funds account:

• On the QuickBooks Desktop homepage, select Create Sales Receipt.
• Choose the customer from the Customer drop-down menu.
• From the Deposit drop-down, choose Undeposited Funds.
• Fill out the rest of the form with the necessary details.
• Select Save & Close or Save & New.

Step 2: Make a bank deposit

Once you have your deposit slip from the bank, you can record a bank deposit in QuickBooks and combine the payments. All the payments in the Undeposited Funds account will automatically appear in the Bank Deposit window.

Next Steps: Review your Undeposited Funds account

It is recommended to regularly review your Undeposited Funds account and promptly process any pending payments.

• From the Lists menu, select Chart of Accounts.
• Right-click on Undeposited Funds and select QuickReport: Undeposited Funds.
• In the Dates drop-down menu, select All.
• Select Customize Report.
• Go to the Filters tab, scroll down the Filter list, and select Cleared.
• In the Cleared section, select No, and then select OK.

The report will display any transactions still in the Undeposited Funds account. To add these payments to a deposit, follow “Step 2: Make a bank deposit.”

Steps to connect bank and credit card accounts to QuickBooks Online

Once you connect your bank or credit card with QuickBooks, online banking or bank feeds will download and categorize all the transactions automatically, eliminating the need for manual entry. All you need to do is approve them. Here is how you can connect your accounts with QuickBooks:

Step 1: Connect a bank or credit card account

QuickBooks allows you to connect several accounts at a time. However, you need to follow a different procedure to connect American Express Business accounts with QuickBooks. To do so, follow these steps:

• Go to Bookkeeping.
• Select Transactions.
• Click on Bank transactions.
• If you want to set up your first bank account, select Connect account. And if you have already created one, choose Link account. (If you are transitioning from QuickBooks Desktop, you have to reconnect your bank/credit card accounts for security purposes.)
• Now enter the name of your bank, credit card, or credit union in the search field. If you are unable to find your bank and still wish to add your transactions, you have the option to upload your bank transactions manually.
• Choose Continue. After this, sign in to your bank using your user ID and password.
• Now follow the on-screen steps, which may include any security checks required by your bank. The connection process may take a few minutes to complete.
• Choose the accounts you want to connect and then choose the account type from the dropdown. Make sure to select the account type that matches your chart of accounts in QuickBooks.
• And if you are unable to locate your account type, select how many previous transactions you want to download (some banks allow the last 90 days of transactions, whereas others allow 24 months of transactions).
• Now click Connect.

Step 2: Download the latest transactions

QuickBooks allows you to download transactions automatically. All you need to do is:

• Refresh the bank feed.
• Go to Bookkeeping.
• Select Transactions.
• Click on Bank transactions.
• Select Update

Step 3: Categorize the downloaded transactions

After QuickBooks downloaded your transactions, you have to review and categorize the transactions under the right category.

How To Identify What is Open in Undeposited Funds in QuickBooks Online?

To determine what is open in the Undeposited Funds account in QuickBooks Online, you can follow these steps:

• Click on the “+ New” button located above the left side menu.
• From the options provided, select “Bank Deposit” under the “Other” category.
• This will display a list of transactions that are currently in the Undeposited Funds account for the selected bank account.

How Do I Clear Undeposited Funds?

To clear the balance in your Undeposited Funds account, you can complete a bank reconciliation or use an alternative method called the Dummy Account Method. Here’s how you can clear the Undeposited Funds account using these two approaches:

By Completing a Bank Reconciliation:

• Make the necessary deposits at your bank.
• Wait for the bank statement to reflect the cleared funds.
• Utilize the bank deposit feature in QuickBooks to combine transactions within the Undeposited Funds account.
• Select the undeposited customer payments you want to combine by checking the appropriate checkboxes.
• Make sure that the total amount matches the figure on the bank statement.

When using QuickBooks, it’s common to make mistakes that lead to an incorrect balance in the Undeposited Funds account. But here’s the important part: that balance should always be zero!

Here’s why it happens: many users, especially those without proper training, don’t realize that certain transactions automatically go to the undeposited funds account. These transactions include:

• When you receive invoice payments
• Use a payment item on an invoice (like a deposit or partial payment)
• Enter a sales receipt

So, if you find transactions hanging out in the undeposited funds account, don’t worry! Just remember to carefully complete the bank reconciliation process to clear the balance. It’s the key to ensuring everything is in order.

By double-checking and reconciling properly, you’ll say goodbye to that stubborn balance and have peace of mind in your QuickBooks finances. Keep it simple, follow the steps, and you’ll conquer the Undeposited Funds challenge with ease!

Dummy Account Method:

Are you dealing with a lingering balance in your undeposited account that just won’t budge? If you can’t match those old transactions to a bank transaction, fear not! Here’s an alternative method that can help you clear that balance once and for all, even if you’re considering alternatives to QuickBooks.

• Go to your Chart of Accounts and create a brand new checking bank account. Now, give it a name that sounds totally fake! We don’t want any confusion with real accounts.
• Save and close it.
• Now, open up the Bank Deposit window. 
• In the choose account dropdown box, select the dummy bank account you just created.
• Now choose those old customer payments that are still hanging out in the undeposited funds account.
• Save your progress and close the bank deposit. 

You will notice that your balance in your undeposited funds account is zero. However, now you have a dummy account that needs to be cleared. Follow the instructions:

• Click on your expense window to create an expense transaction.
• Select an income account that you regularly use to transfer money from your dummy account. 

Now, transfer the full balance from the dummy account to that chosen income account and you are done; your dummy account balance is zero!

How Do I Avoid Undeposited Funds in Quickbooks?

Many users find the Undeposited Funds account in QuickBooks to be tedious, especially for untrained users. It involves an additional step of making multiple entries for each deposit: one to the Undeposited Funds account and another to the correct account. 

However, if your business primarily receives payments through checks or cash that need to be physically deposited at the bank, this account can be useful. Here are some ways to avoid dealing with Undeposited Funds:

• Connect your bank and credit card accounts: One effective way to bypass the need for the Undeposited Funds account is to connect your bank and credit card accounts with QuickBooks. By doing so, all your transactions will be automatically downloaded into QuickBooks, eliminating the need for manual entries. This is particularly helpful if you don’t receive payments primarily through checks or cash.
• Accept credit cards or online payments: Another way to streamline your workflow and avoid using the Undeposited Funds account is by accepting credit cards or other online payment options like ACH (Automated Clearing House). When you receive payments through credit cards or online methods, each transaction is processed as a single transaction. This means that there is no chance for it to show up as a lump sum payment on your bank statement. By accepting electronic payments, you can skip the multi-step process of recording transactions in Undeposited Funds.

By implementing these strategies, you can simplify your accounting processes in QuickBooks and avoid the complexity associated with the Undeposited Funds account.

Conclusion

Undeposited Funds in QuickBooks is a valuable feature that allows businesses to consolidate and manage payments before depositing them into a bank account. It enhances accuracy in recording transactions, streamlines reconciliation processes, and improves financial reporting. By utilizing this feature, businesses can maintain control over their cash flow and make informed financial decisions.