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Undeposited Funds

Normally every bank type account in your chart of accounts aligns with an actual bank account you maintain at a banking Institution. This is not the case with Undeposited Funds, an account that hides beneath many transactions you make in QuickBooks. This topic will be our last destination for Cash in our Nonprofit Chart of Accounts Grand Tour.

Purpose of Undeposited Funds

Both QuickBooks Desktop and QuickBooks Online come with an Undeposited Funds account. This account is used to accumulate cash, checks, and credit card deposits you receive before you record them as deposits in your bank account. The purpose of the Undeposited Funds account is to allow you to group deposits in your books in the same way you physically take them to the bank. This makes reconciling your bank account so much easier.

For example, say you received two checks for contributions, one for $25 and another for $100. You batch them together, take them to the bank and deposit $125. If you recorded each of those checks as a separate amount directly into your operating checking account then you would see two deposit amounts, one for $25 and one for $100. On the other hand, your bank statement will show a deposit of $125.

If instead you recorded the two checks first to the Undeposited Funds account, then you could batch them together when you record the deposit. Now the deposit in QuickBooks will be $125, the same as the deposit amount on your bank statement. The Undeposited Funds account acts like the drawer in your desk where you keep cash and checks until you are ready to take them to the bank.

How Undeposited Funds Works

So how do amounts to be deposited get into Undeposited Funds? It happens when you create the sales receipt or the invoice payment.

In QuickBooks Desktop software you can set a preference under the drop down Preferences menu, Payments section, a company-wide preference to automatically record cash from sales receipts and invoice payments to Undeposited Funds. In fact we suggest you make this setting the default. The other option is to allow the user to select the bank account for each transaction, which can be prone to error if the wrong bank account is selected.

In QuickBooks Online, you cannot select a default “deposit to” account. However, the bank account you select on a transaction will come up the next time you create the same type of transaction. You need to be more vigilant in QuickBooks Online if you make deposits to different bank accounts, such as PayPal or a money market account, or if you sometimes save transactions directly to the operating checking account instead of saving the transaction first to Undeposited Funds.

Where People Get Into Trouble

The problem comes when people do not realize that QuickBooks saved the sales receipt or invoice payment to Undeposited Funds. They don’t see the amount in their bank account in QuickBooks, so they enter another deposit directly into the bank account. Now the money received has been recorded twice – once to Undeposited Funds and again to the bank account. It has also likely been recorded twice to income.  That’s because you cannot do a “one sided” entry. You have to affect another account besides cash when you enter a transaction. Most likely that other account is an income account.

What you should do instead after saving your sales receipt or invoice payment is go to the Banking menu and create a deposit. QuickBooks will show you a list of the amounts waiting to be deposited. Simply check them off and indicate the bank account for the deposit. This step should parallel the physical deposit you take to the bank.

Check your balance sheet report and see if there is an amount in the Undeposited Funds account. This account is in the Other Current Assets section, not grouped with other bank accounts. If there is, open the deposit window to start a new deposit and see if you see a detail listing of the transactions pending deposit. Hopefully any amounts listed are valid pending deposits and the total agrees to the amount on the balance sheet as of today. If not, you have a problem to fix. See Michelle Long’s video on how to clean up a problem in Undeposited Funds.

When to NOT Use a Sales Receipt or Bill Payment

You may now think you should always use a sales receipt or bill payment to enter any cash received. This is not the case. Some money you receive can be added directly to the bank deposit you create in QuickBooks.

In the example above, if in addition to the two contribution checks you also had a $10 refund from a vendor, you could add that $10 directly to the deposit entry form when you create the deposit, for a total of $135 to be deposited.

Common types of cash received that can often be appended directly to a deposit, bypassing a sales receipt, include:

  • Reimbursements from employees or payments on employee advances
  • Refunds from vendors
  • Other miscellaneous income outside the normal flow of your operations

Just remember every time you save a transaction, you are affecting accounts in your chart of accounts. If you want to know which accounts are affected, in QuickBooks Desktop from the sales receipt or invoice payment form click the Reports drop down menu and select the last option, Transaction Journal (or click Ctrl + y). This will open the Transaction Journal report and you can see exactly which accounts are being impacted by that transaction. In QuickBooks Online, look at the bottom of the transaction window and click on More, then click Transaction journal to open the same report.

Using Undeposited Funds can make reconciling your bank account so much easier if used properly. Knowing what accounts are hiding underneath the transactions you enter can make a world of difference!

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