How to Use Undeposited Funds in QuickBooks Online

Please refer to the Certum Solutions YouTube tutorial: How to Use Undeposited Funds in QuickBooks Online above for a visual demonstration and clarification. This article is intended to be a written summary of video content. 

Undeposited Funds is an account in QuickBooks Online. This account is for funds paid, whether by credit card or paper check, and they have not yet been deposited to your bank account (float funds). Undeposited funds can be used when there’s a delay in depositing these funds and avoids an inflated bank balance. The Undeposited Funds account also allows you to batch payments rather than individually entering the deposits, making monthly bank reconciliations easier. 

This account also helps avoid constructive receipt issues and it recognizes float funds. Constructive receipts are funds received “unencumbered”. For tax purposes, this is income that you can use immediately.  

If you have a mobile banking app, you can avoid using the Undeposited Funds account by manually depositing these checks. This is practical when you don’t receive a lot of paper checks.  

However, if you don’t use the Undeposited Funds account while multiple payments are waiting to be deposited, or you’re waiting for float funds to clear, you can run into issues such as an inflated bank balance. This can be problematic when paying bills or projecting cash flow and will unduly complicate your monthly reconciliation. 

If QuickBooks Payments is used, payments will be deposited to Undeposited Funds and the bank deposit process will be automated avoiding the tedious process of doing it manually. 

There may be instances when you’re required to deposit payments manually, such as when there’s a glitch in automation. Always check the Undeposited Funds account when doing your monthly reconciliations. 

Paper checks usually need to be entered manually. Before you physically deposit these checks, you will need to make a Bank Deposit in QuickBooks. 

Under Settings in the Accountant tab, go to Chart of Accounts. Search for Undeposited Funds. The account type will be listed as Other Current Assets. The detail type in your Chart of Accounts will be listed as Undeposited Funds.  

Other Current Assets will be listed on your Balance Sheet, meaning this asset will be used within 12 months or less.  The Balance Sheet will list your assets and liabilities in order of liquidity.  

To navigate to the Balance Sheet, Under the Accountant tab, go to Reports, then Balance Sheet. Go to Undeposited Funds. Double check your dates. The balance in Undeposited Funds will be reflected according to such. Definitely look at this when doing your monthly reconciliation. A balance that remains in the Undeposited Funds account for longer than a week or two may signal a problem. 

Let’s go through the process of depositing a payment to Undeposited Funds. (The same process will be applicable whether check or cash). Under the Accountant tab, click New, then Receive Payment. Use the deposit field to record the payment in the Undeposited Funds account. Complete the date, payment method, and reference number fields. (If you have automated payments integrated with QuickBooks Online, this should have been done for you). Click Save or Save and New. 

Now check your Balance Sheet. Make sure the date is correct. (Your balance sheet is a perpetual statement; it shows current balances according to the date). Once you’ve created your payments, the Balance Sheet will show the figure amounts of those payments to Undeposited Funds. It’s highlighted in QuickBooks, which allows you to navigate further to the Transactions Report which shows the details of deposited funds. 

You’re ready to physically deposit these funds so let’s enter them in your books. Under the Accountant tab, you’ll click New then Bank Deposit under the Other subheading. Make sure the Account and Date are populated correctly. You can batch the payments from Undeposited Funds by checking the top box under Select the Payments Included In This Deposit. You can also print a deposit slip from this page. Hit Save and Close which should pop you back to the Transaction Report.  

If the Transaction Report is date specific, the payments in the Undeposited Funds account should be zeroed out. When it’s time for your monthly reconciliation, this deposit will be shown on your statement and in QuickBooks Online as a single deposit, which is much simpler than each deposit recorded separately. 

Helpful resources will be listed under the description of above referenced YouTube video and feel free to contact Certum Solutions for any questions or bookkeeping needs.