Undeposited Funds in QuickBooks, finally explained.

If you've ever opened your balance sheet and found tens of thousands of dollars in an account called Undeposited Funds in QuickBooks, you're not alone. It's one of the most misunderstood accounts in QuickBooks Online, and one of the most common things we fix when we take over a set of books.

The idea behind it is simple and useful. This guide explains what it's for, walks through a worked example with the journal entries, shows the right way to deposit in QuickBooks Online, and explains how to clean up a balance that's been growing for years.

1What Undeposited Funds is for

Banks don't always receive payments one at a time. You might collect three cheques during the week and deposit them together on Friday. Your bank statement shows one deposit of $1,890, not three payments.

QuickBooks needs to record each payment against the right customer and invoice, but it also needs your bank account to show one $1,890 deposit so it matches the statement. Undeposited Funds solves that. Each payment goes into the holding account first, then a single bank deposit moves them all out together.

In many QuickBooks Online files the account is now named Payments to deposit. Same account, same job, friendlier name. We'll use both names in this post.

2A worked example: three cheques, one deposit

Say you're a GST-registered home inspector in St. Albert. This week three customers pay invoices you'd already sent:

Step 1: receive each payment into Undeposited Funds

Each payment clears its invoice and lands in the holding account. Combined, the three entries look like this:

Step 2: make one bank deposit

On Friday you create a bank deposit containing all three payments:

Undeposited Funds is back to zero. The bank shows one $1,890 deposit that matches the statement line exactly. Each invoice is marked paid. And no income was recorded at either step, because the income was recorded when you sent the invoices. If that part's fuzzy, our guide to accounts receivable bookkeeping covers it.

3How to use Undeposited Funds in QuickBooks Online

• Receive payment: + New, then Receive payment. Choose the customer, tick the invoices, and set the deposit-to field to Payments to deposit (Undeposited Funds).
• Sales receipts: for sales paid on the spot, + New, then Sales receipt, with the same deposit-to choice. See sales receipt vs invoice if you're not sure which form to use.
• Bank deposit: + New, then Bank deposit. Choose the bank account and date, tick the payments that went to the bank together, and check the total matches your deposit slip or bank line.
• Bank feed: when the $1,890 appears in your bank transactions, Match it to the bank deposit you made. QuickBooks can also offer to match a feed deposit directly to several open payments in Payments to deposit.

When to skip it

If each customer payment arrives as its own deposit, like most e-transfers and direct deposits, you can set the deposit-to field straight to your bank account. One payment, one bank line, no holding account needed. Use whichever matches how money actually reaches your bank.

4Common Undeposited Funds mistakes

1. Adding deposits from the bank feed instead of matching

This is the big one. Payments go into Undeposited Funds, then the bank deposit is added from the bank feed and categorized to Sales. The result: income counted twice, and payments stuck in Undeposited Funds forever. Over a year this can overstate income by thousands, and with it, your tax bill.

2. Grouping the wrong payments together

If you tick payments that went to the bank on different days, your deposit won't match any single bank line. Group payments exactly as they were deposited.

3. Leaving card payments in the holding account

Payments from Square, Stripe or QuickBooks Payments arrive net of fees. The deposit needs a line for the processing fee (as a negative amount) so it matches the bank. That fee is the usual reason a card deposit looks "short."

4. Writing off the balance with one journal entry

It's tempting to clear a $40,000 balance with a single entry to income or equity. Don't. That hides duplicated income, wrong GST and unapplied payments behind a plug. If CRA ever asks how your income was calculated, you want the real answer.

What the double-count looks like in numbers

Go back to the three cheques. Suppose the payments were received into Undeposited Funds correctly, but when the $1,890 deposit appeared in the bank feed, someone clicked Add and chose Sales. Here's the damage:

That assumes the invoices were $1,800 plus 5% GST. Notice the bank balance is still right, which is why the bank reconciliation looks fine and nobody notices. The error only shows up as a stubborn Undeposited Funds balance on the balance sheet. Repeat that every week for a year and the overstatement runs into the tens of thousands.

The fix for this deposit: delete the added bank transaction, then create a bank deposit from the three payments (or match the feed line to them), so Undeposited Funds clears and income drops back to $1,800.

5How to clean up an old Undeposited Funds balance

Here's the process we follow when a file has a large, stale balance.

Be careful with any period where you've already filed a GST return or a tax return. Changes there can alter numbers you've reported to CRA. Your accountant may prefer a correcting entry in the current period instead of rewriting history. This kind of work is exactly what catch-up and cleanup bookkeeping is for.

6Preventing it from coming back

Once the balance is clean, a few habits keep it that way. Decide, for each way customers pay you, whether payments land individually (deposit straight to the bank) or in batches (use Payments to deposit). Make sure everyone who works in your QuickBooks file knows that customer deposits in the bank feed get matched, never added. And if you use a payment app that syncs to QuickBooks, check where its deposits post, because some integrations create their own deposits while others leave payments waiting to be grouped.

At every month end, look at the Undeposited Funds balance on your balance sheet. It should be zero or contain only payments received in the last few days that haven't hit the bank. Anything older is worth a two-minute look while it's still fresh. Add it to your month end close checklist.

Plum untangles Undeposited Funds and duplicated income for businesses across Edmonton, St. Albert, Sherwood Park and Leduc. If yours has been growing for a while, book a call and we'll tell you how much cleanup is involved.

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This article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.