So, you are new to using QuickBooks for your bookkeeping needs or you are still learning the nuances of the program. Well, you are not alone! 85% of small businesses use QuickBooks for their accounting software and while it is quite useful, some of the functions are not all that intuitive. Sure it seems simple enough, your Home Page shows a flow chart that shows you the order you need to perform tasks. Your forms, like the invoice and check, are familiar looking. Just fill in the forms and QuickBooks takes care of posting everything to the correct accounts. While it is most definitely much easier than pen and paper, you still need to understand what QuickBooks is doing behind the scenes.
QuickBooks is actually doing quite a bit of work for you so you don’t have to worry, but depending on how you have set up your file and the preferences (Edit > Preferences), you may find yourself worrying. A tell-tale sign of something amiss is that your sales are too high and you have a balance in the Undeposited Funds account (You can check this by looking at your Chart of Accounts and scrolling to Undeposited Funds to see the balance).
The Undeposited Funds account is a holding account, similar to holding money in a dresser drawer until you make a deposit to your bank. When you receive customer payments (using either the Receive Payment or Sales Receipt form) a debit for that amount is posted to the Undeposited Funds account. A credit is either posted to Accounts Receivable (if using the Receive Payment form) or to an income account (if using the Sales Receipt form). This money has not yet been deposited to your (bank) account. In other words, it has not been posted to your bank account.
Note: If you are not using accounts receivable functions such as invoices and payments, or if you take individual payments to your financial institution (rather than a batch of payments), you can bypass the Undeposited Funds account by using the Make Deposits window (found on the QuickBooks Banking menu).
To record the deposits, and clear out the Undeposited Funds account, use the Make Deposit form. When you click on this, a window will open on top of the deposit window. It will list all the payments that have been received but not yet deposited. You want to make a deposit that will equal the exact same amount that was deposited into your bank account. For example, there are three payments showing, one for $1000, another for $2000 dollars and another for $500. You have already taken the $1000 and $2000 to your bank. The total amount of that deposit was $3000. You want the amount you record in QuickBooks to be a total of $3000. Mark those two deposits and click on Save. Now your deposit window shows those two deposits with a total of $3000.
Tip: Make sure you are using the correct bank account and enter the date of the deposit correctly. It’s a little too easy to keep clicking and forget to glance at which account the deposited funds went into.
The Undeposited Funds account will be credited for $3000 (leaving a balance of $500) and the bank account will be debited $3000.
When you go to reconcile the account, instead of seeing two transactions, one for $1000 and another for $2000 you will see only the one deposit for $3000. This will also be the amount on the bank statement. This makes reconciling the account so much easier.
For further help in understanding this account or for any other questions, please don’t hesitate to contact us. We are here to help our community of small businesses!
Here is a nice video showing a more detailed explanation on how to work with the Undeposited Funds Account in QuickBooks by Nerd Enterprises. To skip directly to the material, fast forward to 2:45 at the bottom.