The Undeposited Funds Error

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General Ledger

UNDEPOSITED FUNDS ERROR

            One of the most common user problems associated with QuickBooks, especially for new users, is failing to understand and properly use, the Undeposited Funds Account.  Many users are not even aware that QuickBooks creates this account, and by default records all of your receipts from Payments on Invoices, and Sales Receipts into this account.  Users then manually post the checks, cash and perhaps even credit-card payments they take in directly to their Bank Account(s) using the QuickBooks Make Deposit window without removing these receipts from Undeposited Funds.  This results in an overstatement of Undeposited Funds, that have never cleared, and an overstatement of income. 

            QuickBooks uses the Undeposited Funds (an ‘other current asset) account as a clearing account to track funds received until they are deposited.  The best comparison is to think about your manual banking process.  Frequently most businesses take-in cash and checks all day; then lock them in a safe or security-box until the next day when they prepare the deposit slip and take the prior day’s receipts to the bank.  Well, QuickBooks uses the Undeposited Funds account in exactly the same way.  It is a ‘holding place’ for the funds you take in until you actually take those checks and cash out of Undeposited Funds, and put them in the Bank using the Deposit process.

            QuickBooks automates the behind-the-scenes postings for these transactions by walking you through a series of windows to reduce Undeposited Funds and making your deposit to the appropriate bank account.  But this works correctly only if you follow the steps; it is when users skip a step that most errors with Undeposited Funds are created.

THE PREFERENCE ‘NOT’ TO USE THE UNDEPOSITED FUNDS ACCOUNT

            QuickBooks allows users to select a method for controlling where daily ‘money-in’ transactions are posted other than the Undeposited Funds account.  By Default the Company Preference for Payments, located within the Preferences Item under the Edit Menu is set to “Use Undeposited Funds as a default deposit to account”.  The QuickBooks Administrator choose to remove this preference by un-checking the check-box.  This Company Preference is ‘global’ affecting all QuickBooks users within the Company (.QBW) file.

Problems with this Preference

            When the QuickBooks Administrator turns off the “Use Undeposited Funds as a default deposit to account” preference, QuickBooks changes the familiar Sales Receipt and Receive Payments windows, by adding a “Deposit To” field with a drop-down arrow to access the various Bank and Other Current Asset type accounts set-up in the Chart of Accounts.

            There are a couple of problems associated with making the choice to not use Undeposited Funds.  The first problem begins when Users select the wrong account from the drop down window and post a Sales Receipt (or Payment) into that account in error.  When users don’t see those money-in transactions in the intended Bank Account, they simply post another Deposit for those same funds and overstate income.  In addition the account they erroneously posted the transaction into is also misstated.  Since the Drop-down list permits users to post into any Bank or Other Current Asset type account, everything from Accounts Receivable to Inventory Assets could be affected.  This makes finding and correcting the problem that much harder.

            The second problem occurs when it comes time to do the bank reconciliation.  Because each Sales Receipt or Receive Payment transaction recorded posts into the QuickBooks Bank Account Register individually, but Bank Statements reflect the sum total of the Deposit actually made, the individual attempting to perform the bank reconciliation must attempt to figure out which individually posted deposits in QuickBooks actually match the Deposits reflected on the Bank Statement.  When a business has hundreds of daily receipts, all lumped into a single Deposit at the bank for one or more actual days of business, this process can be difficult at best, and almost impossible at worst.

            QuickBooks uses the Undeposited Funds account to help insure that your Deposits recorded in QuickBooks actually match the ‘real life’ deposits you make at your bank.  As such, serious consideration should be given before deciding to turn-off the Undeposited Funds preference.

PREVENTING THE UNDEPOSITED FUNDS ERROR

Preventing the most common Undeposited Funds problem requires Users to simply follow the proper “Deposit” methodology in QuickBooks:

  1. In QuickBooks, from the Banking menu, select Make Deposits.
  2. QuickBooks will open both the Make Deposits window and also the Payments to Deposit window, select the appropriate “payment method type” based upon which items you want to deposit into a particular bank account.  Note many credit/debit-card items are deposited directly into an EFT (Electronic Funds Transfer) Bank Account and thus need to be posted separately from all other deposit items such as checks.            
  3. Now you can select the items in the Payments to Deposit window you wish to deposit, you may select these items individually using the Ö (checkmark) to include feature, or using the Select All button at the bottom left of the window, if the entire balance from the Undeposited Funds window is to be deposited. Once this step is completed, proceed to Make Deposits window using the OK button at the bottom of the Payments to Deposit window.
  4. QuickBooks has posted the payment items you checked on the Payments to Deposit (Undeposited Funds) window onto the Make Deposits window. On the Make Deposits window, select (or verify) the appropriate Bank Account to which the funds are to be deposited and Save.  If you wish to use the QuickBooks feature to ‘print’ deposit slips directly from QuickBooks you may do so using the Print feature button at the top of the Make Deposits window prior to saving the deposit.

That’s it; correctly depositing your receipts insures that you never experience the Undeposited Funds error.

FIXING UNDEPOSITED FUNDS ERRORS

“The Problem”

            You have been doing the deposits all wrong.  You had been entering an invoice to send to the customer and then receiving the payment to show the invoice as paid, but when you looked in the check register and didn’t see the money you entered a deposit which agreed to the bank statement.  But now there is a big mess because your accountant tells you that the income has been recorded twice, once from the invoice and once from the deposit. HELP?

Two Possible Solutions

            There are two alternatives, depending on the number of errors.  One alternative is to ‘reconcile’ the deposits (as a whole) as of a specific date, and the other is to ‘fix’ the details of each deposit individually.  On a realistic basis, if you have more than a handful of deposits, you will probably not ‘fix’ each individual deposit, unless of course you are getting paid over-time to do so.  The principles in resolving the Undeposited Funds error remain the same despite the method chosen to fix it.

Fixing Individual Deposits

  1. From the Chart of Accounts, right click on the Undeposited Funds account, and select QuickReport: Undeposited Funds.
  2. QuickBooks will generate an Account QuickReport for the Undeposited Funds account.  Now click on Modify Report and select the Filters tab; scroll down the Choose Filter list and select Cleared. Click on the radial button for NO as your Cleared option; then Click OK.
  3. QuickBooks now displays only those transactions that have not been ‘cleared’ from the Undeposited Funds account in the Account QuickReport.  These are the transactions that were probably posted in error to your bank account.  If there are several of these transactions, you will want to Print this report.
  4. Close the Account QuickReport and Open your Bank Register.  Look for the deposit you entered directly into the register for one of the Customers shown on the Undeposited Funds QuickReport.  The register entry will almost always be within a few days of the date shown on the Undeposited Funds QuickReport.
  5. When you have identified one of the deposits recorded in error, double-click on the deposit to open it.
  6. Once you have opened the Deposit, verify that it contains the transaction(s) posted in error; pay special attention to the From Account, if it does not say “Undeposited Funds”, it means that the deposit has been manually recorded to an income account rather than being properly posted from “Payments to Deposit.”
  7. Click on the Payment Button on the menu bar of the Make Deposits window, this will open the Payments to Deposit window.
  8. Select the Payment(s) on the Payments to Deposit window that match the transaction(s) posted in error directly into Bank Register.  Click OK; this will add the payment(s) you select to the Make Deposit window.  Even though it appears like you are about to actually ‘double’ the amount of your deposit, we still have an essential adjustment to make.  Note that this process works even if you have already ‘cleared’ the offending transaction as part of your bank account reconciliation because the final amount of the transaction will still equal the amount originally recorded.
  9. To the deposit enter a line item corresponding to each of the original transactions posted; as a general rule I recommend that you list the Customer so that the transaction posts true to their overall records within QuickBooks.  You will list the Customer’s Name, and the ‘same’ account (income) that appears in the original transaction, it is not necessary to post a payment method, but if you use class tracking, enter the same Class as in the original transaction. In the Amount column enter the same amount as in the original transaction, but it should be recorded as a ‘negative’ number.
  10. Once you click Save & Close the transaction, QuickBooks will confirm that you want to make changes to the transaction, click Yes. You have just corrected the individual deposit, your adjustments will credit Undeposited Funds, to correct the overstatement; and will debit the appropriate income account(s), to correct the overstatement.  Your Check Register will still show the exact same amount for the Deposit, and will remain ‘cleared’ if you had previously reconciled your Bank Account.