Undeposited Funds in QuickBooks Online
(this blog post is also available in a YouTube video: https://youtu.be/gkR_poP1KoQ)
QuickBooks Online utilizes a special kind of account to handle money that has been received from a customer, that has not yet made it into the bank. They call this account "Undeposited Funds". The name of the accounts makes sense to me because I live this lingo all day long, but a few of my clients have pointed out that they don't understand what it's used for.
I give them the example of a bank envelope
Some businesses still use this, but most do not, opting for more efficient methods of getting funds into the bank. That said, the basic function of the bank envelope would be to collect all of the checks and cash for the day or week, then take it all at once to the bank, perhaps at the end of every week or two. This works great for efficiency's sake, but for recordkeeping, we would conceptually not have received the money until it is actually deposited in our account.
Enter "Undeposited Funds" into the equation - this special type of account allows us to record a payment as received (thereby keeping our Accounts Receivable records clean), while also not showing our bank balance increasing until we actually put that money into our bank.
Let's look at this in practice.
Here, we see Antonette has an open invoice for the amount of $12193.50, and she has just sent us a check for $7000. Also, Adriel owes us $16000.00, and he has brought us $5,000 cash. We are going to take that money from each customer and eventually get it into the bank, but we can't get to it today or tomorrow, so we need a way to keep our A/R records updated, while keeping the bank account balance accurate.
The first step is going to be for us to receive the payments, so for this we click on the "+New" button, and select "Receive payment" - here we will enter the customer name, the date we receive the payment, the payment method, any reference number, the "Deposit to" account, and an amount received. As a general rule, I ask all of my clients to always make the "Deposit to" account be "Undeposited Funds".
Occasionally, the Undeposited Funds account does not exist in a company file - this account SHOULD always be created with each new QBO file, but in case your file does not have it, you will need to create it the first time you go to use Undeposited Funds.
Now that we have the payments marked as received, we can see that the Open Invoices report is now accurately reflecting the payments, but on the balance sheet, the Crystal Clear Checking account still does not reflect any deposit being made.
It's now next week and we're going to take the cash and the check to the bank. We will want to come into QuickBooks and record that deposit. Choose the "+New" button, select "Bank Deposit", then select the payment items we are going to deposit. Additional to the Cash from Adriel and the check from Antonette, we also received a refund from our insurance company of an overpayment of premium. We can also include this in the same deposit window in the "Add funds to this deposit" section. Finally, we also have the opportunity to record any cash that we may have held back from the deposit, maybe to fund a petty cash drawer, or for the business owner to take a cash draw from.
Now that the bank deposit is recorded, our Balance Sheet now shows the accurate bank balance, and our Undeposited Funds account is back to $0 - you'll also notice that our Petty Cash fund shows the $200 that we held back from the deposit.
Now that we have everything recorded correctly, we can rest assured that our numbers are accurate, and that we can trust in the reporting coming from our accounting software. Want to work with a professional on ensuring these numbers are entered correctly 100% of the time? Reach out to me (Request a Discovery Call here) and remember, I'm The Numbers Guy...so you don't have to be!