In the last several articles we have looked at the workflows for 'sales' using Sales Receipts as our first example in which we also introduced 'Undeposited Funds.' We then went on to explain Invoicing & Payments, and Estimates & Progress Invoicing. In each of those cases our illustrated workflows ended each with a Bank Deposit. But in 'real life' the improper handling of bank deposits within QuickBooks, and specifically 'Undeposited Funds' is an all too common problem. This article takes you through the correct workflow for properly handling Bank Deposits and Undeposited Funds when using QuickBooks Online.
Why This is Important
If it looks like the Income on your Profit and Loss Statement is too high, it’s a sign that your workflow for making deposits is incorrect. This is one of the most common “PEBCAKs” (Problem Exists Between Chair and Keyboard) that I come across.
It’s not obvious how to make Deposits in QuickBooks Online, so a lot of business owners and beginning-level bookkeepers focus on the Banking Feed instead of Customer transactions, compounding the error. Here’s how to do it right!
After the business has taken a payment, but before the money gets put in the bank, those payments accumulate in the Undeposited Funds account. Undeposited Funds is like the blue deposit envelope that I used to take to the bank. It’s where QBO holds company sales until someone physically deposits the stack of cash and checks, and until Merchant Services batches credit card transactions into the bank account.
It’s important to clean out this account by depositing the cash & checks, and grouping credit cards. This account should be empty ($0) except for transactions pending at the bank.
If the company’s Balance Sheet indicates that it has money in Undeposited Funds, this may be a PEBCAK!
It’s EXTREMELY important that the amount that gets deposited matches the amount in the bank EXACTLY. This step allows you to group transactions in the same way the bank combines them.
There’s nothing less fun, and more time-consuming, than seeing a deposit on your bank statement that doesn’t match the amount shown in your QuickBooks Online.
I recommend that when you or your employee goes to the bank, write down which checks have been deposited so that you have a reference. Better yet, use the bank’s smartphone app to deposit checks, so that each one is processed individually. Then company deposits will always match.
The Correct Workflow
To properly record company Deposits, select +New > Bank Deposit.
The Deposit window opens. The undeposited transactions are displayed.
The QBO Deposit Existing Payments (Undeposited Funds) window
Alicia-P_Lesson-07_Fig-01
Confirm the bank account where the Deposit will post.
Make sure the date reflects the date the money will physically be deposited at the bank.
Check off the Payments that will be combined in the deposit.
There is an area below for any additional money added to the deposit if it’s not sales-related (for example, a rebate check from an Insurance Company). Note that this area can also be used to deduct PayPal merchant service fees (see below).
If the owner pockets cash instead of depositing it into the bank, use the Cash back goes to at the bottom of the screen. Choose the Owner Draw/Distribution Equity account. This deducts the cash from the total amount going into the bank.
The Deposit total should now match your bank deposit slip.
Click the Print button to print a deposit slip or summary report from QuickBooks.
Select Save and close.
Again, it is crucial that this Deposit total matches the amount actually going into the bank.
QuickBooks Payments Deposits
QuickBooks Online has its own built-in merchant services, with rates competitive to Square and PayPal.
One of the benefits is that QBO will close paid invoices, batch daily credit card and ACH transactions, and match Deposits on your business’s behalf. Bookkeepers don’t have to lift a finger, which saves a lot of hassle!
Monitor the status of these deposits from the Sales > Deposits tab.
In this screen you can see which individual transactions were grouped together, when they hit the bank, and how much the fees were.
If the money is still on its way, look for the estimated date of arrival.
QBO - Deposits from QuickBooks Payments
Alicia-P_Lesson-07_Fig-02
PayPal and Square
If your company uses Merchant Services like PayPal or Square, they always deduct their fees before the money hits the bank. This is challenging and confusing because you can never directly match the amount of your sale to the deposit.
PayPal has an App that integrates with QBO to make entering PayPal sales much easier. It will import the total sales and the Merchant Service Fees automatically.
To compensate, enter a Merchant Service deduction like this:
- Create Sales Receipts for each sale. Use the actual total amount the Customer paid.
- In the Deposit window (+New > Bank Deposit), check off the total sales for the day to match PayPal or Square’s reports.
- In Add Funds to this Deposit at the bottom, enter “PayPal” or “Square” under Received From, and your Merchant Services Fees account.
- In Amount, subtract the total fees for those transactions. The total on the Deposit will now equal the Net that you received in your bank account.
PEBCAK! If you don’t take this step, and just pull in the net payment from the Banking Feed, you are under-reporting your income and reducing eligible tax deductions. It may not seem like a big deal because the amounts wash, but your taxes are wrong and so are your sales reports. Worse, if you apply for a loan you will have under-reported your gross income and your numbers won’t look as good as they could.
Lesson Wrap-up
Staying on top of bank deposits and Undeposited Funds will save you hours of headaches in reviewing your financials, or even more hours if you are a Pro trying to cleanup a client's mess. Once your clients are familiar with this workflow, reconciling will be a piece of cake, so if you are 'their Pro' the best thing you can do is ensure they know how to use Undeposited Funds and make their deposits correctly from the start. Even better, incorporating QuickBooks Payments merchant services really streamlines the process, and that means it's almost fullproof. Pretty cool!
Look for the webinar I am doing in conjunction with Insightful Accountant on April 22 titled, Mastering the Banking Feed. And for other training opportunities I offer head over to the Royalwise website, you might want to check out the Mentorship Program for Bookkeepers. From QBO Fundamentals to deep dives into advanced features, these videos will cut your learning curve down from figuring it all out yourself or searching on YouTube.
Be sure to also check out my upcoming webinar with Insightful Accountant. Master the Banking Feed on April 22 and Vendor Workflow in QBO on August 12.