How To Clean Out Undeposited Funds

How to Clean Out Undeposited Funds in QuickBooks | Booktied

June 29th, 2020 Posted by Bookkeeping Tips 0 thoughts on “How to Clean Out Undeposited Funds in QuickBooks | Booktied”

How To Clean Out Undeposited Funds in QuickBooks

In bookkeeping, your number one goal should be to maintain the highest level of accuracy possible.  By matching every dollar in with every dollar out, you can keep a watchful eye on your business and take charge in case of any financial inconsistencies.

This accuracy, however, can be rather difficult to maintain.  Bookkeeping is not a new concept.  However, in its modern iteration, it has become more complicated.  As a result, there are many areas in which mistakes can be made.

As a bookkeeper, your job is to monitor not only the mistakes and oversights of the business itself, but also your own mistakes or oversights.  By controlling both of those, you can be the best bookkeeper possible.

One of the most common mistakes we see in our work with bookkeepers is a build up in undeposited funds.  It’s an extremely easy mistake to make and, thankfully, a rather easy one to fix as well.  Let’s dig into what causes a build-up of undeposited funds, and how to clean out undeposited funds in QuickBooks.


What Causes a Buildup in Undeposited Funds?

A build up in undeposited funds are the result of improperly following the industry standard process for money-in transactions.  The process is meant to proceed as follows:  First, you send an invoice to the client.  The client pays the invoice, resulting in a cash balance in their account.  Normally, at this point, you would deposit that payment and record it.  Finally, you match the payment with the deposit.

A buildup in undeposited fund occurs when, instead of depositing the money and recording the payment as the correct income, you simply add it to an income account from the Banking Section of your QB account.  This results in an “Uncategorized Income” amount on your income statement, and the payment itself remains an undeposited fund.  How can we fix this?


The Remove and Record Method in QuickBooks

There are two main methods for removing undeposited funds from your account.  The first is called “Remove and Record”.

The Remove and Record method essentially consists of retracing your steps, correcting the error, and then performing the workflow order correctly.

Start at the Banking section of your QBO account.  Go to your bank account, and click undo on the uncategorized money-in transactions.

At this point, you have corrected the record on your income statement under “Uncategorized Income”.  But there is still the payment itself, which remains in the bank deposits window.  Now, it’s time to go back and do the workflow correctly.

Go to the Bank Deposits window, select the bank account in question, and enter the date of the payment.  Then, simply select the payment you just removed from the bank account window, and hit Save and Close.  You’re all set!  The payment has now been removed from the Undeposited Funds account and recorded as an actual deposit.


The Dummy Bank Account Method in QuickBooks

Start by creating a bank account in your Chart of Accounts window.  Name it something like “Dummy Bank Account”, so it can’t be confused with real accounts.

Go to your Bank Deposits Window, and select the dummy bank account.  Then, select the payments you want to clear from the Undeposited Funds Account, and hit Save and Close.  This “deposits” those funds into the dummy bank account.

At this point, the Undeposited Funds Account has been cleared of the payments.  However, there is now a record of money sitting in a bank account that doesn’t actually exist.  To alleviate this, go to the expense window, select your dummy bank account, and then select an income account to transfer the money to.  Then, simply make a payment from your dummy bank account to your income account in the same dollar amount as the previously undeposited fund.  Hit Save and Close, and then verify that the balance of the dummy bank account is zero.  That’s it!


Which Method Should I Use?

There are pros and cons for each of these methods.  Which one you use will depend on your needs as a business and as a bookkeeper.

If you need accuracy above all else, and you don’t care how long it takes, use the Remove and Record method.  This method is the most accurate, as it eliminates redundant transactions and ensures that your sales income will be correct.  The drawback to Remove and Record is that you must work on each transaction one at a time.  That means it could take hours, or even days, to work through a particularly cluttered Undeposited Funds Account.

This is not the case with the Dummy Bank Account method.  This method can be done in bulk.  No matter how many years of mistakenly Undeposited Funds you have, you can knock them all out within a few minutes.  Of course, there are always trade-offs.  With the Dummy Bank Account method, your final income will be less accurate, since this method tends to understate money-in transactions.


If you’re still confused about what to do with your Undeposited Funds Account, have no fear!  You’re certainly not alone – this is one of the most common issues that bookkeepers have with QBO or QBD.  That’s why Booktied is committed to providing you the best QuickBooks help and bookkeeping advice possible.  We help you maintain accuracy and efficiency without pulling your hair out or biting your nails.

For more information, feel free to contact us with any questions you have.  To see a list of what we can do for you, just visit our services page.  Happy bookkeeping!