Before You Start

This guide assumes you have administrator access to QuickBooks Online banking and AR reports. Familiarity with basic payment processing is helpful.

Overview

20 min
Setup Time
Intermediate
Difficulty
Periodic
Maintenance

What You’ll Learn

  • Understanding the Undeposited Funds workflow
  • How to correctly record customer payments
  • Matching payments to bank deposits without error
  • Strategies for clearing a backlog in Undeposited Funds
  • Preventing future Undeposited Funds issues

1. Understanding Undeposited Funds

The Undeposited Funds account in QuickBooks Online (QBO) acts as a temporary holding account for payments you’ve received but haven’t yet deposited into your bank account. It’s crucial for accurate reconciliation.

When to Use Undeposited Funds

  • You receive multiple payments that will be deposited as a single batch (e.g., daily cash/check deposits).
  • You process credit card payments that are batched by your processor before hitting your bank.

When Not to Use Undeposited Funds

  • Payments that immediately hit your bank account individually (e.g., direct bank transfers).
  • If using integrated payment processing that syncs directly to the bank feed.

2. Common Causes of Errors

Errors in the Undeposited Funds account usually stem from mismatches between how payments are recorded and how they are deposited.

Cause A: Missing Deposit Step

This is the most common reason for a growing Undeposited Funds balance.

Symptoms:
  • Payment recorded, but not ‘Deposited’ in QBO.
  • Bank feed shows deposit, but no match found.
Impact:
  • Undeposited Funds balance grows incorrectly.
  • AR aging looks inflated or incorrect.

Cause B: Direct Deposit Override

This occurs when payments are recorded directly to a bank account, bypassing Undeposited Funds, but then a deposit is created for the same payment, leading to duplicates.

Expert Tip: Always record payments to Undeposited Funds first, then create a Bank Deposit to move them to the actual bank account. This is the correct workflow and ensures clean reconciliation.

3. Step-by-Step: Clearing the Backlog

Follow these steps to systematically clear out any old or erroneous entries in your Undeposited Funds account and ensure proper matching.

Here is a sample transaction record, typical of what might be waiting in Undeposited Funds.

{
  "transaction_type": "Payment",
  "customer_id": "CUST-001",
  "amount_received": 500.00,
  "date_received": "2024-03-10",
  "payment_method": "Check",
  "reference_number": "CHK-12345"
}

4. The Cleanup Process

  1. 1

    Run an Undeposited Funds report

    Go to Reports > Accountant & Taxes > Undeposited Funds Detail. Filter by date if needed to identify old transactions that haven’t been deposited.

  2. 2

    Identify corresponding bank deposits

    Review your bank statements or bank feed in QBO. Look for actual deposits that match the payments listed in your Undeposited Funds report.

  3. 3

    Create a bank deposit (if missing)

    If payments were recorded but never deposited in QBO, go to + New > Bank Deposit. Select the payments from the Undeposited Funds window that collectively match a single bank statement deposit.

  4. 4

    Make corrections (if needed)

    For duplicate entries or payments incorrectly linked, you may need to edit the original payment transaction or create a journal entry to clear the balance. Consult an accountant for complex or large discrepancies.

Warning: Direct Editing Risks

Directly editing payments that have already been reconciled or linked to invoices can cause more issues. Always work carefully and consider consulting a QuickBooks ProAdvisor for significant cleanup tasks.

5. Preventing Future Issues

Best Practices Checklist

  • Always use ‘Record Deposit’ for payments collected offline (cash, checks, grouped credit card transactions)
  • Match bank feed transactions to existing QBO bank deposits, not individual payments
  • Regularly review the Undeposited Funds account balance (monthly or weekly)
  • Train staff on correct payment recording procedures in QuickBooks
  • Leverage integrated payment solutions where possible to minimize manual steps

Need Expert Help?

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