Guide to Undeposited Funds in QuickBooks Online

Accounting systems are strange beasts. The undeposited funds account in QuickBooks Online is a mystery to many because it’s not intuitive. That unfamiliarity leads to bad data, mismatched transactions, and messy reconciliations. Below, I provide you with the essential, actionable information you need, using terms relevant to your firm.

Understanding the Undeposited Funds Account

In QuickBooks Online, the undeposited funds account exists as a temporary holding place for customer payments you have received but have not yet deposited into your bank account. Think of it as a physical cash drawer where you keep checks and cash before you physically walk into the bank to deposit them. You do not leave money in that drawer forever. Having a balance in this account usually signals an error or unfinished transaction.

QuickBooks uses this holding account so you can group multiple customer payments into a single bank deposit, matching what’s on your real bank statement. When the system is used correctly, undeposited funds in QuickBooks Online flows cleanly from receiving a payment to a real bank deposit. When it’s used incorrectly, your accounts receivable, bank reconciliation, balance sheet, and revenue accounts can easily go off the rails.

The #1 most important thing to remember: Do not record a customer payment directly to a bank account. Record it to the Undeposited Funds account first. Recording it straight to the bank means you bypass the holding step, and your revenue gets counted twice, or your AR is incorrectly inflated.

Proper Workflow for Undeposited Funds

The correct workflow for undeposited funds in QuickBooks Online has three distinct steps:

1. Create a Customer Invoice. This records the revenue and sets up accounts receivable for what your customer owes.
2. When the payment arrives, record it to Undeposited Funds. This tells QuickBooks you have received the money from the customer but have not yet taken it to the bank. In QuickBooks Online, the payment should hit Undeposited Funds instead of a bank account.
3. Record the Bank Deposit. Later, when you actually deposit those payments at the bank, create a Bank Deposit transaction in QuickBooks. That picks up all the payments sitting in undeposited funds that match the deposit slip you took to the bank and moves them into your real checking or savings account as of the deposit date. This step clears undeposited funds and reflects the proper bank balance.

Understanding this sequence ensures that your AR is properly cleared, your revenue is recognized once, and your bank and books reconcile.

You can picture the undeposited funds account as a drawer where you put all checks, cash, or credit card payment receipts you receive throughout the day, then empty it into the bank with one deposit. That bank deposit transaction then moves the funds out of the Drawer (undeposited fund) and into the Bank (your bank account in your chart of accounts).

Sales Receipts Have a 2-Step Process

Because when you create a sales receipt, you are making a sale and receiving payment at the same time, Sales Receipts in QuickBooks Online combine the first two steps of the workflow into one. So the process for Sales Receipts is:

1. Create a Sales Receipt and record the payment to Undeposited Funds. This records the revenue and tells QuickBooks you have received the money from the customer but have not yet taken it to the bank. In QuickBooks Online, the payment should hit Undeposited Funds instead of a bank account.
2. Record the Bank Deposit. Later, when you actually deposit those payments at the bank, create a Bank Deposit transaction in QuickBooks. That picks up all the payments sitting in undeposited funds that match the deposit slip you took to the bank and moves them into your real checking or savings account as of the deposit date. This step clears undeposited funds and reflects the proper bank balance.

Most Common Errors with Undeposited Funds in QBO

The biggest mistake is to record a Deposit transaction posted to income instead of to Undeposited Funds. When you do that, QuickBooks records revenue again at the deposit step. You already recorded the revenue with the invoice, so now the income is doubled. Meanwhile, accounts receivable can still show the invoice as unpaid. When you finally look at undeposited funds, you see a growing balance that never clears.

Another common error is:

1. You correctly record a customer payment to the undeposited funds account and apply it to the invoice. So far, so good.
2. But instead of manually recording the bank deposit, you rely on a bank feed that automatically records the deposit and posts it straight to income.
3. You think QuickBooks will automatically clear the undeposited funds account, but it doesn’t. Your deposit in the bank feed is treated as a new income transaction. That means you now have double revenue, and undeposited funds is still stuck with a balance that never cleared out.

At the end of a period, if undeposited funds shows a balance, you need to figure out what hasn’t been properly deposited, whether the payments are actually still pending at the bank, or if an error is hiding in the account.

How to Resolve Undeposited Funds Issues

Resolving a borked undeposited funds account takes logic and a careful process. Here is a methodical cleanup plan:

1. Drill into the Balance Sheet’s Undeposited Funds Amount.
   1. Run a report on the undeposited funds account and look at each transaction line. Check the transaction types. You should only see payments and deposits. If you see adjusting journal entries or other codes, that’s a red flag.
   2. Look at the account balance column. Follow it down. If it zeros out occasionally but then jumps, the transactions after that point are the ones causing trouble.
   3. Expand the date range a bit into the future. Sometimes, undeposited funds from the end of one period genuinely clear in the first days of the next when the deposit actually happened. 
2. Identify Payments still waiting to be deposited. There are two ways to find them:
   1. Open a new Bank Deposit transaction in QBO. At the top of that screen, QuickBooks lists payments waiting in undeposited funds that could be included in a deposit.
   2. Open the undeposited funds register and filter by “Not Reconciled.” This will show the payments that haven’t yet been taken to the bank. 
3. Find the deposits that SHOULD have linked to these payments.
   1. In the Banking screen under the “Categorized” tab, locate the deposit that probably got recorded straight to income instead of being tied to undeposited funds.
   2. Match the customer payments to that deposit, and then delete the incorrect income line(s) so the deposit total remains the same, but now properly links the payments. This removes the income duplication and cleans up undeposited funds.

This method is time-consuming, but it ensures each payment is correctly matched to the proper deposit and your reports stay reliable.

Batch Clean-Up When There Are Too Many Payments

If your undeposited funds account is so clogged that individual correction isn’t practical, you can clear payments in bulk with an adjustment. Create a new Bank Deposit transaction. In the top section, check all of the open payments you want to clear. In the bottom section, enter the same revenue accounts and negative amounts to offset the revenue originally recorded incorrectly.

If you use the same income accounts that were mistakenly used earlier, you maintain consistency in reporting. You can group these adjustments by month or do them all at once– but grouping monthly will produce better period-to-period reporting. These adjustments don’t affect your actual bank account, but they do reclassify the mismatched revenue and clean up undeposited funds for accurate reporting.

Wrapping up

Using undeposited funds in QuickBooks Online isn’t hard once you internalize the workflow: invoice, payment to undeposited funds, then deposit to bank. Messing up the sequence leads to double-counted revenue, skewed AR, sticky undeposited funds balances, and reconciliation nightmares. By treating undeposited funds as the temporary holding bin it was designed to be, and by fixing errors carefully, accounting departments and bookkeeping firms can keep statements clean and reconciliations tight.

If you follow this workflow and tackle the cleanup methods above, that persistent balance in undeposited funds will finally make sense, and your QuickBooks Online reports will be more accurate and informative.

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