How "Undeposited Funds" Accounts Relate to the Income Process in Quickbooks

September 11, 2017

how undeposited funds accounts relate to the income process in quickbooks.pngThis example relates to the QB desktop version but the same principles apply in QB online.

When working in QB, are you sometimes mystified about questions it asks you, account names it uses or what certain data fields are for? You’re not alone.  In this article, I’ll address one of the more common questions I am often asked, both from clients and from tax preparers:  “What is the account called “Undeposited Funds” all about?”  To explain Undeposited Funds, I will also address many of the icons presented in the middle of the Home Page.

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In a nutshell, an Undeposited Fund is an account on your Chart of Accounts that is a holding spot for funds received in payment for your goods or services, but they have not yet made it to a QB deposit slip form.

Why is it needed?   

Many people ask, “Don’t I simply use a deposit slip form and list any money received that makes up that total deposit, then code it to the income account it relates to?”

If you’re using Invoicing and Sales Receipts, the simple answer is no.    

As you can see from the image above, the flow chart shows Invoices, Receive Payments and Create Sales Receipts all coming before the Record Deposits icon.  If you are using the Invoice or Sales Receipt forms, you can either deposit straight to a bank account or to deposit to Undeposited Funds.   I suggest the latter because it allows you to more easily reconcile your bank account.  

Invoice and Sales Receipt Differences

Always make sure all of your clients or customers are entered correctly in QB as a Customer for the Name Type.  If you want to let someone know they owe you money, create an Invoice so you can send them that Invoice straight from QB via email.  Invoices are used when there is a timing difference between the service rendered/product sold and the date you will eventually be paid.  

A sales receipt, on the other hand, is used for a sales transaction that happens immediately. With these, you are paid at the same time.  Think about all the restaurant or retail store receipts you receive when buying meals or goods and paying for them on the spot.  Whereas a lawyer or an accountant might invoice you for services during a specific month and expect payment after you receive the invoice.

In the course of one week, you may receive several invoice payments or create several sales receipts for funds received.  It would be impractical to deposit them one at a time.  The payments are also most likely paid in different mediums: cash, check, credit cards, ACH, debit cards, etc.  Your goal is to group these payments into deposit slips that exactly match the deposit amount that will hit your bank account.

In the Preferences Section, you want to be sure your QB is set to use the Undeposited Funds account.  Choose the Edit menu > Preferences.  On the left side of the window, click Payments, then click the Company Preferences tab and be sure the checkbox is populated to Use Undeposited Funds as a default deposit to account.  Click OK to close and save.

When you are ready to create deposit slips, go to Record Deposits on the Home page.  The Payments To Deposit window may automatically open, or you can click on the Payments tab right above the date field.  This window lists all of the funds you first received through Receive Payments or Create Sales Receipt.  

Choose the appropriate payments to populate each deposit slip:

  • Credit Cards and Debit Cards that were batched in the same day should be brought into one deposit slip.  Usually VISA & MC are batched together and go onto one deposit slip.  American Express usually needs its own deposit slip.  
  • Cash and Checks chosen should match the deposit to the bank so create separate deposit slips in QB for each actual deposit slip or batch of checks scanned for deposit.

Completing the deposit slip has now pulled the funds out of the Undeposited Funds account and coded the funds as a deposit to your bank account.  The payments window should always be emptying on a regular basis into deposit slips (If you have payments that are never used, then you have a problem and you need to backtrack and find out why).   

One final note: Dates in the date fields in QB transaction forms are very important to the accounting process for many reasons.  Use these guidelines for dates to use in the process described above. All four dates could be different:

  • Invoice or Sales Receipt
    • when the goods changed hands or the services were delivered
  • Receive Payments date
    • For checks & cash, when you received the funds.
    • For credit or debit cards, when you ran the cards.
  • Deposit Slip date
    • When you created the deposit
  • Bank Statement
    • The date the deposit cleared the bank account

I hope this article was helpful for you! if you'd like to learn more about how you can optimize your business with Quickbooks, check out our Quickbooks How-to Guide!

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Margie Monroe

Margie Monroe, CPA, LLC

Margie has been a CPA since 1980 and has always enjoyed assisting people. Whether it was her early years in both public and private accounting or her twenty plus years working with nonprofit organizations. For the last ten years, she has assisted businesses and individuals with their accounting needs using QuickBooks Pro, Premier, Enterprise, POS and Online through Margie Monroe, CPA, LLC. She can be reached at margie@margiemonroecpa.com.
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