The Secret of the Undeposited Funds Account Undeposited Funds Account (2024)

15 Mar The Secret of the Undeposited Funds Account

You’re Connected!

So, you connected your Bank Feed to QuickBooks Online and the transactions are pouring into your file. Yay! It is a beautiful thing to see cloud accounting come to life with real-time data being fed into your books. The data is only as good as you make it, however. Keep reading to learn more about managing the data that has come to life in your company file — specifically, bank deposits. Let’s talk about receiving money from customers via your QuickBooks Online Bank Feed.

The basics of managing your clients and receivables in QuickBooks Online

Are you using your QuickBooks Online Company file for a repository only of income received? If so, you do not need to utilize the Invoicing/Clients/Customers section of your file. If you do not wish to see who bought what product on which date and how much they paid, you can categorize incoming deposits directly to their Income accounts. I see people do this with frequency when they have invested in industry-specific software that feeds into QuickBooks Online.

Third-party software is often used to manage the intricacies of client billing built around a particular product or service. Third-party billing software is typical for industries such as the Medical Arts, where insurance payments are the biggest source of client income. It’s also common for attorneys who bill in multiple ways: hourly/retainer/contingency/flat rates, etc. There are many other business models that use third-party software to manage their receivables, but if your business is not yet ready for that additional expense, then consider QuickBooks Online as a wonderful resource for managing your clients and receivables.

Using QuickBooks Online to Track Client Sales

Are you using QuickBooks Online to track your client sales? Let’s talk about how you can make the most of it! Whether your client pays you at the time of purchase or later determines if you should use a Sales Receipt or an Invoice. If you receive money on the spot, you should use a sales receipt, just like you would receive when you go to the grocery store and purchase. If clients pay you after the goods or service has been provided, then choose an invoice. Always, whether you use an invoice or a sales receipt mark your deposit account as Undeposited Funds.

Your Undeposited Funds account is the home for money until it is received at the bank. Client payments come in many different forms: cash, check, credit card, ACH. Each different type of payment likely has a different timeline before it arrives safe and sound in your bank account. If clients pay you by cash or check, you often don’t get to the bank to make deposits for a few days.

For credit card processing, it may fund overnight, it may be the better part of a week before the funds become available at your bank. Some credit card processors pay their clients net of merchant service fees. Some only charge for merchant service fees once per month, some charge separately but with each individual transaction. For each of these, if, instead of depositing payments to undeposited funds and instead you mark them direct to the bank account, you will be adding confusion. Dates of payments and amounts are likely not to be a mirror match and each time there is a variance, confusion ensues.

Sorting payment date with the Undeposited Funds Account

One of the many purposes of the Undeposited Funds Account is to help you sort out the dates and amounts of payments so that you can create a match inside your bank feed. The Bank Feed is wonderful in that it is real-time data feeding into your system but you need to tell your QBO file what that money was received from. Here are a couple of examples:

• You had 4 checks that you deposited at the bank on the same day. The bank feed will only show the total of the 4 deposits, not each individually. If you have marked the payments in QBO to Undeposited Funds, you should have an easy list of payments to choose from on similar dates that you will be able to MATCH in the Bank Feed to the total of the checks deposited on that day.
• Your Credit Card Processor pays you out net of Merchant Service Fees. If you use Undeposited Funds, you will be able to go into your QBO MAKE DEPOSITS screen and choose the undeposited funds deposit that matches to the total invoice or sales receipt, then at the bottom of the deposit, you will be able to add the fees you encountered for Credit Card Processing.
• Your client chose to pay their bill using multiple payment methods. They paid a portion by Credit Card, which has a different processing time than the portion paid in cash. This means that you need to record multiple different payments to close out the sale in QBO. When the money comes into the bank feed, it will be easier to MATCH, given that your records will indicate exactly the payment type and dates.

Undeposited Funds is an Asset to your Business

There are other very important reasons for understanding Undeposited Funds. It may sound like a fancy accounting term. But it is important that a business owner understands the power of this account. Undeposited Funds is an asset to your business because it shows on your Balance Sheet. If the undeposited funds balance is high, there should be more money coming into your business soon. If you think you have received all the money due to you, then Undeposited Funds becomes the temperature gauge for checks and balances in your system. Say the Undeposited Funds balance is high but you don’t have any money in-process to you. This means that you have a problem in your system. Is income being double recorded? Is something wrong with a deposit? Did a Credit Card payment from a client fail or a check come back with insufficient funds? These are all possibilities if you have an Undeposited Funds balance on your Balance Sheet when you know there is not any money in-process to you.

On a cash basis, the income for your business is recorded when you mark an Invoice as paid. Should you have a large sum of Undeposited Funds and no money in-process to you, then you are truly overstating your Income as well as overstating the assets in your business. You pay taxes based on the net income of your business. With an incorrect Undeposited Funds balance, chances are high that you are overstating your profit and paying too many taxes.

Marking all incoming client payments to the Undeposited Funds account improves your chances at keeping your file clean, organized, and in good condition. yhat is a powerful secret to help you understand the profitability of your business.