How to Clean up Undeposited Funds in QuickBooks Online

Undeposited funds in QuickBooks Online can be confusing.

The way undeposited funds is supposed to work dates back to the old days of cheques, where you would record payment from your customer, and put the cheque in the drawer until you went to the bank.  The funds had not yet been deposited, so you would record the customer payment to undeposited funds.  When you went to the bank you would create a bank deposit, and clear out the undeposited funds account. I think things were simpler then!

Now we have a myriad of payment options, and payment by cheque is extremely rare in most businesses.  
Add to that a connection to your bank that can also add to the confusion!

I have a video that walks through the simple steps to correctly use the undeposited funds account in QuickBooks Online:

That’s great if you haven’t already made a mess!

The most common error I see in QuickBooks Online is to record customer payments from the bank feed as sales, and record the customer payment also.  If you have recorded the payment to undeposited funds, and then added the bank entry as a sale you will be overstating your income, and your profit numbers will be too high.

You won’t have accurate information to to make proper business decisions.

If you are checking your balance sheet regularly, and that is something that is important to do, you will notice that the undeposited funds account is increasing and that you may have incorrectly recorded some of the payments from your customers.

You can download my free check list that will walk you through a monthly list of items to look at on your balance sheet to help ensure your reports are accurate.

If you have recorded the customer payment to the bank, and also added the bank entry as a sale, then your bank balance will also be incorrect.  You will be able to see that when you compare the bank balance to the QuickBooks balance on your Banking or Transactions tab.

There are two ways to clear up undeposited funds.  The correct way, and the quick way!

If you have old transactions in your undeposited funds, this may have happened from a data transfer from QuickBooks Desktop, or another accounting program the quick way may be an option.  If you opt for this method be sure to let your accountant know what you are doing. They may need to refile your prior income tax returns.  Or at least check that the numbers as filed were correct.

If you are looking at recent transactions I would suggest that you track down the incorrect entries and match them up to the payment you have recorded.  This will take more patience!

In this video, I walk through both methods:

Before you carry out any clean up run your income statement and make a note of your income and profit number.  After you have finished your clean up run the reports again – you will be amazed at the difference!  Now you will have accurate sales, and a trueprofit.  You can make decisions for your business, and you won’t be paying tax on profit that is not real.

If you have duplicated your transactions by adding bank entries as sales and not customer payments it can be time consuming to track down the duplicated entries.

I do have a course that will help you.

I would love to hear how you decided to do your clean up – and what the difference was in your sales and profit!  It is so rewarding to get your numbers inorder.

Good luck! 😊

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Video transcript

Hi, Kerry here from My Cloud Bookkeeping. I work with small businesses and entrepreneurs to help them to keep their books in order using QuickBooks Online and whatever other applications make sense for their business, so they have the information they need to manage their cash flow and their business on a regular basis.

Now, today, I'm going to be talking about undeposited funds. This is one of those areas that often gets messed up. If you're looking at your balance sheet and I recommend you look at your balance sheet often, I have a checklist down below that will talk more about that. You may have an amount for undeposited funds and it may be ever-increasing, which indicates a problem, or perhaps you're on the bank feed where the transactions come in to QuickBooks from your bank, and you're trying to put in a deposit. And when you open up the matching, you've got a list of like hundreds of transactions that are old, and you just have no idea where they've come from or what to do with them, that's the undeposited funds and that needs to be cleaned up so that you know that your sales are accurate, your balance sheet ratios, aren't out if you're trying to look at how much money do I have in the bank and how much do I owe? It's a very, very important ratio for managing your business. If you want to know more about any of this, just comment below, or reach out book a time.

I'm going to walk through two different ways to deal with the undeposited funds. A caveat here is that I only like the first one; the first one is going to walk through how to fix it properly. The second one is just going to be a, like, let's just get rid of this. And I really want to caution you on that. If you've done a conversion from somewhere else and they've come in and that's why you've got all these undeposited funds, or if they all relate to a prior year, you've done your filings and you know you're not going to be messing anything up, then go with that second option, but do be very careful and talk to your accountant if you're going to do that. Particularly if some of these things relate to prior years and you've filed your taxes because it's going to mess up your numbers. But it will get rid of the undeposited funds, so there's that.

Well, I'll get into this a little bit more ina moment, but if you do find that you are walking through those first steps and you've got a lot of duplications, and you're not sure what's going on, checkout the link below for my “Finding and Fixing Duplicated Transactions” course. Because quite often what's happened when you haven't cleared the undeposited funds, you've actually added things in more times than you should. Now, if you've done that your income could be too high. You've got amounts that look like they're owing from your customers that are actually not, and maybe your profit's too high, and if that's the case, you could be paying too much in income tax and too much in sales tax. So do check that course out below. It could end up being a quite cost-effective saviour for you, and it might take a little while to do this. So without further ado, I'm going to walk through these two different methods. And do be careful with this, because if you take that first option and walk through that, it'll take you a while, but at the end, your books should be accurate. But if you're just doing a cleanup for things that are really old, that you just need to get out of the way, then go with the second option.

So firstly, I'm going to go through a simplified version of the way to work through clearing undeposited funds correctly so that we properly record everything that's happened. This is for when you're doing something in a current year and you want to make sure that all your records are accurate. So we're going to have a quick look at the balance sheet first because you know, I always love to start there. Let's see what we've got in here. We have undeposited funds of $9,240. Now I'm going to have a quick look at the profit and loss just so we can see what these numbers are now and what they become later.

So at the moment, we have sales of $95,675, and I'm just making a quick note of that. And we have a profit, this is theoretically what we're paying tax on of $26,063. So first thing I'm going to do is pop to this bank feed and I'm going to have a look in categorized. Now, because it is a sample company there's not a lot here, but you can very easily see that a couple of things here have been categorized into uncategorized income. So straight away we would think that that's not correct. Another way to find that would be to pop into your chart counts and look at the transactions in uncategorized income. So what I'm going to do now is I'm going to undo these two transactions and throw them back onto the bank feed. So here we are back on the bank feed going to review. So we were in categorized, now we're going to review and you can see that these two items and now sitting back here. QuickBooks has made this payee; we've talked about this many times, QuickBooks artificial intelligence, and then we've got this suggestion of uncategorized income.

So clearly what has happened is somebody has come along and just clicked, ‘add’. Oh, yep, I remember I put this in the bank and just going to add it to income without stopping to think about the ramifications of that. So now what we'll do is we'll click the transaction to open it up and we'll say find match. And straight away, QuickBooks is able to say, wow, look, these three payments on the 1st of August, all add up to $8,760. We can, we will know that these were, say three cheques that we received or e-transfers or whatever that we've recorded against and deposited funds that we can now click save. Then we have this one here for $480. So let's have a quick look at this. Click ‘find match’ and bingo, QuickBooks is done exactly the same thing. It's found two transactions within the correct date range that add up. Now, the deposit was the 13th, we'd recorded them on the 1st, just keep an eye on that sort of thing. I'm in a sample company so obviously, it's not real life, but if it's real life, you're going to know what's going on. So then we click save.

So you may have many more things hanging out there in your undeposited funds that you need to look at, but let's quickly pop back to our reports and see what's happened. We go to the balance sheet we have undeposited funds of zero, but more importantly, let's have a little look at what's happened to our profit and loss.
The income that was $95,000 has now dropped down to $86,000 and the profit is $16,000. So before we were looking at $26,000. So this is $10,000 of difference inprofit, it's part of why it's so important to clean up the undeposited funds correctly because they could be having a significant impact on your bottom line. Not having done that correctly, would've made it look like you had made $10,000 more and in theory, you could've paid tax on those $10,000. So keep an eye on your undeposited funds. If you, if this account, or back in the balance sheet of the account, it's increasing and not clearing down to zero regularly, it's a good idea to check out what's happening.

Now, if you have doubled up transactions and it's not as easy to find them, I do have a course, there's a link below—Finding and Fixing Duplicated Transactions, and that will help you to track down if you've got a whole pile of old ones. But, next, we're going to walk through how to fix it the quick and dirty way, which is not my favourite way by any means, but it's useful for if you have a lot of really old transactions. So we'll goto that next.

So for this example, we're sitting with undeposited funds of $33,500. And the purpose of this example is for the situation when you have a lot of really old transactions. I've seen it, for example, when a conversion's gone through and one company had hundreds and hundreds of transactions from 2006 or something that were recorded as undeposited. Now when you're doing your cleanup to make sure your trial balances all agree, you will have found that but when you go to do your bank deposit, this function up here, it still all shows up and it's really messy.

So we open up this we can see every time we want to do a bank deposit, we have to scroll down. In this case, we only have a few, because I've only made a few, but imagine if you have hundreds of these. So what we want to do is we want to make it, we want to do two things; clear up the undeposited funds, but also clear up this bank deposit so it's not a mess.

But clearly, these items from 2017, didn't go into the checking account. And what we're going to do is we're just going to make a fake bank account just so we can clear out this function and the undeposited funds. So I'm going to call it the ‘undeposited clearing’ for the sake of calling it anything. What I'm doing now, setting up an account is something you can also do through the chart of accounts. So save and close.

And now I have an account that I can put this to without messing up any of my banking records. The other thing I would suggest doing is keeping all of these transactions back in the year that they relate to you really don't want to be messing up anything current. So if we select all of these here and we say, save and close, what we've done now is we've moved this amount from the undeposited funds to undeposited clearing that new account we made. Now, there isn't really a bank account called undeposited clearing. So now we're going to clear that up as well.

So we're going to go, new, expense, we're going to, we're not really paying anybody, it's not real. We're paying it from the undeposited clearing account. And now if you think back to the prior example, all of those transactions that had not been recorded properly had been recorded against income. And this is also part of why I don't like using this method because we are messing around with income and expenses in prior years that can make a mess. And it's also why I would suggest not using this method for current, you know, in a current year. But here we have $33,500. We need to take out of this un-deposit clearing account. We're going to use sales, the income account, and ‘out of scope tax’ because the last thing we want to be doing is messing up old sales tax. But if you're doing it properly and you know, it is sales tax, then that's what you should do. So now we click save and close here. We have nothing in the undeposited funds. Undeposited Clearing is gone. The impact of this will have been seen down in retained earnings. If we looked early, this would've been $33,000 higher.

Now, be sure you let your accountant know if you've done something like this, or even better get help from your accountant, particularly one who knows QuickBooks. But this is how you can do a very, very quick cleanup to empty out undeposited funds so that you can utilize that bank deposit function.

I'd love to hear which option you went with, how it worked for you. Oh, I forgot to mention at the beginning, run an income statement before and an income statement after so you can see the impact that, that this cleanup has had on your results and get a bit of an idea of the magnitude of what you've cleaned up and give yourself a pat on the back. Because if you went with that first option, it's probably going to take you a while. And the second option is a nice big, quick cleanup, which hopefully you've paid attention to the fact that I've said be careful.

I have a myriad of checklists and different downloadables; look at the links below. Something to help with the matching of transactions so that hopefully this won't happen to you again, a checklist for what to do before you reconcile your bank because now that you've done this, you're going to want to make sure your bank accounts are all reconciled and properly in order. Grab that month-end checklist and check out your balance sheet. Make sure everything looks tight because if you've cleaned up your undeposited funds, chances are now your books are perfectly in order. Well, here's hoping!

Have any questions, just please let me knowin the comments. There's also a link to my calendar. If I can be of assistance, I'd love to help.

If this video was helpful, click like, subscribe to my channel, and I'll see you again soon. Cheers.