Undeposited Funds Balance in QuickBooks: How to Clear It

What is an Undeposited Funds balance in QuickBooks, and why does it keep growing?

Undeposited Funds is a temporary account in QuickBooks Online that holds payments you have recorded but not yet put in a bank deposit (QuickBooks Online help). A payment stays there until you group it into a bank deposit. The balance grows whenever payments are recorded and the deposit step is skipped. The steps on this page come from QuickBooks Online's help pages; QuickBooks Desktop and other software may name the account or the screens differently.

A big balance does not by itself add income. Income is overstated when the same money was also entered as new income, or when a payment was recorded that no money followed. Which report shows it depends on whether you use cash or accrual accounting; the sections below show how to tell which case you have.

Four things make it grow:

• The payments were never grouped into bank deposits, because each bank line was handled on its own.
• The bank line was added as new income instead of matched to a deposit built from the payments, so the same money is in the books twice.
• A payment was recorded that no money followed: a bounced check, a duplicate entry, a customer who paid another way.
• The money reached an account the books do not cover, such as a payment-app balance or a second bank account.

A case is not simple when:

• the balance runs back more than a year;
• it holds payments from several sources, such as checks, card processors, payment apps and cash;
• you cannot tell which deposits were also entered as income;
• a filed return may have been prepared from these books.

Gather before you start:

• bank statements for every month the balance covers;
• each card processor's or payment app's payout reports for the same months;
• the account's transaction list, oldest first;
• copies of deposit slips for checks and cash, which Publication 583 lists among the supporting documents for gross receipts;
• the income report by month, run on the method your return uses;
• the filed return for each year the balance touches.

Where is the Undeposited Funds account, and what if it has a different name?

The account is in the Chart of accounts, and the vendor says it can be renamed, so look in the Detail type column for "Undeposited Funds" rather than at the name (QuickBooks Online help).

The Deposit to field on each payment form decides where the payment lands. Pick the account used for undeposited funds when the payment will be grouped with others later. A payment sent straight to a bank account is not in Undeposited Funds; the vendor says to select the bank account when you will not combine deposits (QuickBooks Online help), and that bank line can then be matched to the payment.

Is the Undeposited Funds balance supposed to be zero at year end?

Not necessarily, but at any date it should hold only payments received and not yet banked. The vendor calls the account temporary, and the sources cited here set no required balance. At year end, expect checks in hand or a card batch the processor has not yet paid out. Each of those should appear as a deposit on the next statement. Anything older than your usual gap between receiving money and banking it needs an explanation.

Date the payment the day you received the money and the deposit the day it was made: the slip date for checks and cash, the day the money arrived for a card or app payout. The gap between the two dates is what the account covers. A deposit made late in a month that the bank credits after month end is a deposit in transit on that month's reconciliation, so do not change its date to match the statement; Publication 583 lists deposits not credited among the reconciling items.

For tax, the bank deposit date does not decide when income counts. Under the cash method, income counts when you actually or constructively receive it. Constructive receipt means it is credited to your account or made available to you without restriction, and it does not apply if your control of it is subject to substantial restrictions or limitations. Money your agent receives for you counts as received when the agent gets it. Whether money a card processor holds has been received therefore depends on the facts, such as whether the processor acts as your agent or holds the money under restrictions, so check the processor's terms and the balance it showed for you on the last day of the year. You cannot hold checks to push the income into the next year. Under an accrual method, income generally counts in the year it is earned, whenever the payment arrives (Publication 538).

Does a big Undeposited Funds balance overstate my income?

Not by itself. Income is recorded by the invoice, sales receipt or payment. Grouping payments into a bank deposit moves money from Undeposited Funds to the bank account and adds no income. Income is overstated when the same money was also entered as new income, or when a payment was recorded that no money followed; the table shows each case.

A stale balance also misstates the balance sheet. Lenders read that statement (financial statements for a bank loan), and a corporation's return may carry one too (Schedule L).

How do I match several customer payments to one bank deposit?

Build one bank deposit from the payments the bank received together. The vendor says to combine multiple transactions into one record to match the statement, and that recording each payment separately leaves the books out of line with the bank (QuickBooks Online help).

1. Select + Create, then Bank Deposit.
2. In Account, choose the bank account that received the money.
3. Check the box for each payment in that deposit. The vendor says every payment in Undeposited Funds appears in this window. If one is missing, check that its Deposit to field was that account and that it is not already in a deposit.
4. Confirm the total equals your deposit slip and the line on the bank statement.
5. Save. The payments leave Undeposited Funds.

When the bank feed then shows that line, match it to the deposit. The vendor's banking page says that when the transaction already exists in QuickBooks, you may have the option to match it (QuickBooks Online help). Adding a line the books already hold records the same money twice.

A deposit built wrongly can be undone. Deleting the deposit returns all its payments to Undeposited Funds, and removing one payment from the deposit returns just that payment (QuickBooks Online help).

How do I find which payments belong to which bank deposit?

Start from the bank statement, not from the account. Each deposit line is a total, and the payments behind it must add up to it.

1. List the deposit lines on one month's statement.
2. For a check or cash deposit, use your copy of the deposit slip. It lists what went in.
3. For a card or app payout, use the processor's payout report. It lists the payments, fees and refunds in that payout.
4. In the Undeposited Funds list, find the payments dated before the deposit that add up to the total.
5. If they do not add up, look for a fee or refund taken out of the payout, a payment from an earlier month, sales tax or tips inside the payout, or a payment recorded twice.

A payout that is smaller than the sales behind it is normal. Tying payouts to a sales report or Form 1099-K is a separate job: reconciling sales and payouts.

How do processor fees and refunds fit in a batch deposit?

The deposit total must equal what the bank received, so a fee the processor kept is a separate line inside the deposit. In the bank deposit window, the vendor says to leave the original payments alone and add the fee in Add funds to this deposit as a negative amount, in Bank Charges & Fees (QuickBooks Online help).

A refund the processor took out of a payout is not a fee. Record it as a refund to the customer so the sale is reversed: recording refunds in the books. Sales tax and tips also ride inside a payout; the processor guides cover them: online processor payouts and point-of-sale card deposits.

Do not force a total with an unexplained line. If the payments, fees and refunds do not add up to the bank amount, find the missing item first.

What if the deposit was entered as new income and the payments are still sitting there?

The same money is counted twice. Keep the payments, because they close the customer's invoices, and replace the added income entry with a deposit built from them.

1. Confirm the pattern: one deposit on the bank statement, an income entry of that amount in the books, and unbanked payments that add up to it.
2. Remove the added income entry.
3. Build the bank deposit from the payments, as above, dated the day the bank posted it.
4. Match the bank line to that deposit instead of adding it.
5. Compare that month's income with its deposits. Income should fall by the amount removed.

If the month is already reconciled or locked, reconcile it again afterwards: reconciliation beginning balance wrong and closing date after taxes are filed. If the doubled income reached a filed return, the return may need amending: duplicate income in QuickBooks.

How do I clear or zero out old Undeposited Funds balances, or payments that were never deposited?

Clear the balance one payment at a time, oldest first. Each payment is one of four things.

Reconcile each month against its statement before you move to the next. If a month you change sits in a year already filed, save that year's reports first and check the closing date (closing date after taxes are filed); whether the return needs amending is a question for the person who prepared it. If overstated income reached a filed return, the tax paid may be overstated too. A refund claim has a deadline: 3 years after filing the original return or 2 years after paying the tax, whichever is later (IRS); who files, and how, depends on the entity: duplicate income in QuickBooks. A balance that will not reconcile after this: bank feeds are not reconciliation.

Three shortcuts cause new errors:

• Deleting payments to reach zero. Deleting a real payment usually reopens its invoice, so the customer's balance is overstated and the receipt trail is lost. If the money did reach the bank, its bank line is left with no payment behind it. If that line was added as income, the income is still counted twice on an accrual report; on a cash-basis report the total can look right while the invoice shows unpaid.
• A journal entry that moves the balance to income, equity or a catch-all account. It hides the cause. Publication 583 says computerized records must reconcile with your books and return and support the entries on it, so keep the bank statement or payout report behind any entry that clears this balance.
• Dating the fix today. For a deposit the bank has already credited, use the day it posted, so the old month reconciles. Only a deposit the bank has not yet credited waits as a deposit in transit.

Example

These examples are illustrative; the amounts are in US dollars.

Checks deposited in two trips

A landscaper receives 12 checks in March totaling US$9,600 and records each as a payment to Undeposited Funds. Seven checks (US$5,600) go to the bank on March 8 and five (US$4,000) on March 22. The statement shows two deposits. The landscaper builds two bank deposits from the payments, one per trip, and each total equals its deposit slip. The balance for those checks is zero.

A card batch with fees

An online seller's card processor pays out US$4,850 for 40 sales, after US$150 of fees. The 40 payments total US$5,000. The seller groups them in one bank deposit and adds a fee line of minus US$150 in Bank Charges & Fees. The deposit equals the bank's US$4,850, and the 40 payments leave Undeposited Funds.

An old balance that was also entered as income

A consultant finds US$18,000 in Undeposited Funds from two years ago: six client payments of US$3,000 each.

• Two years ago: each payment was recorded, and each bank line was then added as income. Income for that year is US$18,000 too high.
• Last year: the balance sits unchanged, and the bank account still reconciles.
• Now: the consultant removes the six added income entries and builds six bank deposits from the payments, each dated the day the bank posted it, and matches each to its bank line. The balance is zero, and income for the first year falls by US$18,000 in the books. Because that year's return was prepared from these books, the consultant checks whether it needs amending, and whether that year is locked, before changing it.

Different for you?

• The balance runs back years, spans many payment sources, or you cannot tell which deposits were also entered as income: get bookkeeping help to settle what the balance really holds, which entries to remove or match, and whether a filed year was affected.
• Income is doubled in places other than this account: see duplicate income in QuickBooks.
• Payouts, fees or a Form 1099-K do not match your sales: see reconciling sales and payouts.
• Old invoices were never paid: see writing off unpaid customer invoices.
• A reconciliation is off after you changed old entries: see reconciliation beginning balance wrong.
• You want a routine that stops the balance from building again: see bank feeds are not reconciliation.
• The books are months behind, or the IRS has written about the year: see catching up on overdue books with bookkeeping help, or an IRS notice to your business.