QuickBooks Tip: Group Customer Payments for Bank Deposit with Undeposited Funds

When used correctly, the Undeposited Funds feature in QuickBooks can help simplify how you record and track customer payments and reconcile bank deposits that are comprised of multiple customer checks. This feature groups payments together so you can quickly match to the aggregated deposits shown on your bank statement. However, this feature can also be a source of frustration for QuickBooks users who may not fully understand how to best use it.

Undeposited Funds is a holding account that records payments received from customers until those deposits are made into your company’s bank account. It is like an envelope of cash or checks where payments received from different customers are held.  When payment comes in from the customer, the invoice is closed and Accounts Receivable is updated. The company keeps those checks or cash on hand until they are deposited to the bank.  As checks and cash are received from customers, the Undeposited Funds balance will increase; and once those amounts are deposited to the bank, the balance will decrease.

One of the common pitfalls is to record missing deposits directly to the bank account because users are unaware that the deposits have already been recorded in Undeposited Funds. If a balance in the Undeposited Funds account on your balance sheet has ever led you to inadvertently double-post customer payments or overstate cash, or if you just want to better understand this feature and avoid confusion, read on.

Follow these steps to properly use the Undeposited Funds function in QuickBooks Online:

1. Create an Undeposited Funds account if one does not already exist:
   1. Go to “Accounting” on the left side bar
   2. Choose “Chart of Accounts”
   3. Select “New” account
   4. Select “Other Current Asset” for account type
   5. Select “ Deposited Funds Account” for detail type
   6. Save and Close

2. Create an invoice:
   1. Click the “+” symbol in the top right corner
   2. Select “Invoice”
   3. Choose the customer to be billed (on the top left side of the invoice)
   4. Enter in the product/service description and the amount being invoiced
   5. Include sales tax if applicable

3. When you receive payment:
   1. Click the “+” symbol in the top right corner
   2. Select “Receive Payment,” under customers
   3. Choose the customer the payment relates to; under “Outstanding Transactions,” select the related invoice(s) you received payment for
   4. You can also search invoices by number by clicking “Find by Invoice No.”
   5. When entering the receive payment information, make sure to choose “Undeposited Funds as the selection in the “Deposit To” dropdown menu
   6. Another way to receive payment is to go directly to the invoice and click the “Receive Payment,” button on the right hand corner under “Balance Due”
   7. From the main page, on the left side bar, the “Sales” option allows you to see which invoices remain open; under the “Action” column, there will be a “Receive Payment” option for any open invoices

4. When depositing a check to the bank:
   1. Click the “+” symbol in the top right corner
   2. Select “Bank Deposit”
   3. Under “Select the Payments Included in the Deposit,” check the amounts that relate to the bank deposit
   4. Be sure to double check that the amount of the deposit matches the deposit that was made at the bank

It’s important to confirm that the Undeposited Funds account balance regularly goes to zero. If a balance remains, this could be due to duplicated deposits which could skew income posted to the profit and loss – a common pitfall. A zero balance in the Undeposited Funds account indicates there are no amounts waiting to be deposited to the bank.

You should also avoid manually entering deposits that have corresponding invoices.

Accepting payments by credit card? The invoice will appear in Undeposited Funds as soon as the payment is processed. When the customer submits payment, QuickBooks will automatically reduce Account Receivable and add the amount to Undeposited Funds.  In order to move the payment from Undeposited Funds to the appropriate bank account, simply select “Match” functions under “Actions” for that deposit.

If you have questions about using the Undeposited Funds feature or other functions in QuickBooks, contact me or another member of Kaufman Rossin’s QuickBooks Consulting team.