Many accountants HATE the undeposited funds account in Quickbooks. I can’t say I blame them depending on whether or not the account was used properly. The account is actually quite helpful when used as designed.
Undeposited Funds is a special account created by QuickBooks as a clearing account for payments that have been received but not yet deposited into the bank account. The easiest way to visualized this account is to picture it as the top desk drawer. As payments come in each day, they are entered into the computer as a payment toward a specific customer or invoice; then it’s placed in the top desk drawer (and as a best practice, stamped with the company bank deposit stamp). At the end of the day, the drawer is opened and money or checks are gathered and taken to the bank. At that point, the make deposit function is completed in QuickBooks to pull the undeposited funds onto a deposit slip. The total of this deposit slip in Quickbooks should agree with the bank deposit being made.
This process is also used to settle credit card batches, i.e. you post the customer credit card payment to the customer account, then at the end of the day when the credit card batch is settled, you “deposit” the credit card transactions so your Quickbooks deposit amount matches the credit card batch settlement report.
The problem occurs when the money is entered one day and the deposit is made on a different day. During the interim, the amount will be in undeposited funds. Once the deposit is made, the undeposited funds account will zero out. Undeposited funds is a zero balance account, meaning it should always zero out at some point.
Example: 5 Payments are received 1/29/15 for $5000 but they are not taken to the bank until 2/1/15. Undeposited funds account balance at 1/31/15 will be $5000 until those checks are taken to the bank and it clears out on 2/1/15. This is perfectly normal and the way the account should work.
The journal entry Quickbooks makes behind the scenes is:
Debit Undeposited funds Credit Accounts receivable (customer payments are posted to open invoices) related QB Function: Receive Payment
Once it’s deposited Credit undeposited funds, debit bank account. (the deposit is made at the bank) related QB Function: Make Deposit
Undeposited funds is merely a clearing account to make bank reconciliation simple. QuickBooks deposits quite simply would not work correctly without this account and the account is hard-coded into the software, meaning it cannot be name changed or deleted. Additionally, journal entries to this account have, in the past, led to software errors and financial reporting issues.
Best paperwork practice: Print your deposit summary from Quickbooks and attach the bank receipt or credit card batch to the front, the total amount being deposited to the bank and the date should match the Quickbooks summary report exactly.
Common error #1: posting customer payments and letting Quickbooks deposit directly into the bank account, bypassing undeposited funds. Now you have a bunch of individual deposits to reconcile on the bank account which is more difficult, if not impossible, depending on the quantity of transactions.
Common error #2: Receiving a customer payment, letting it sit in undeposited funds. BUT, when doing the bank reconciliation, you post the bank deposits to Income directly. Now you have a bunch of “undeposited funds” and have duplicated your income.
The undeposited funds account can be an asset if it’s used correctly both literally and figuratively.