Undeposited Funds in QuickBooks

In QuickBooks, Undeposited Funds is a temporary asset account that holds customer payments, like checks or cash, until they are deposited into your bank account. It functions as a virtual "holding area" so that the funds recorded in QuickBooks match the actual deposits made to the bank, which simplifies bank reconciliation.

To use it, you record received payments to Undeposited Funds, then periodically use the "Make a Bank Deposit" function to group these payments into a single deposit that mirrors your bank statement.  

If you are looking at your bank register and notice that the Deposit transaction state "Undeposited Funds," this is because that will have been the last account that the payment touched before getting deposited into the Checking account. This does NOT mean that the payment is undeposited in this case. It just means that that was the "Credit" to remove the deposit from UnDeposited funds in the accounting journals.

Undeposited Funds Account showing in the QuickBooks Bank Register related to a deposit

Here's the accounting that goes on behind the scenes of each transaction:

Estimate

• Non-Posting

Invoice

• Debit (🔴) Accounts Receivable

• Credit (🟠) Income

Receive Payment

• Debit (🟢) Undeposited Funds

• Credit (🔴) Accounts Receivable

Undeposited Funds (Holding)

• Shows balance of payments not yet deposited (🟢 Undeposited Funds)

Deposit

• Debit (🔵) Bank Account

• Credit (🟢) Undeposited Funds
  

As you can see, the last step moves the money from the Undeposited Funds account and into the Bank Asset Checking account. This is why you see Undeposited Funds as the account associated with the deposit in the bank register.

See this visualization for example:

So, where do the Deposited Funds really end up on your Financials? Wherever the INVOICE transaction LINE ITEMS (Products and Services) pointed to. Your invoice line items are how "Income" transactions (Sales & Revenue) are recorded. Your line items could point to different accounts, though, so you'd need to follow the line item back to the Products and Services area to see which account these point to.

In some cases, when payments are received from customers but are not properly matched to a Deposit, your QuickBooks accounting file will incur a balance in UnDeposited Funds that will need to be reconciled to zero on a regular basis. If not, then at year-end, it may overstate your balance sheet assets and potentially incorrectly affect income as well.

Some Undeposited Funds balances are correct, and others may not be. By having us do a clean-up on your Undeposited funds account, we will identify which payments need to be matched to deposits and which ones are still rightfully UnDeposited. This could be due to waiting for your merchant processor to release funds to your bank account or waiting to deposit checks that have been received into your bank account as well. We can help you clean up and reconcile this account so that it displays the correct figure on your balance sheet.