Undeposited Funds explained (and how to clean it up)

What Undeposited Funds is

Undeposited Funds is a holding account. When a customer pays you, the money is real, but it is not in the bank yet: it is a cheque (check) on your desk, cash in the drawer, or card sales waiting for the processor's payout. Undeposited Funds is where that money sits in your books until you take it to the bank.

It is a current asset, like a bank account, but it is not a bank account. Nobody sends you a statement for it, and it should never hold money for long. A healthy Undeposited Funds balance is small and young: yesterday's cheques, this morning's cash.

Why it exists: one bank line, several payments

Say three customers pay you by cheque in one week, and you take all three to the bank on Friday:

Your bank statement shows one deposit of $5,460.00, not three. If each payment had gone straight into the bank account in your books, your register would show $1,200, $860 and $3,400, and nothing in it would match the $5,460 line when you reconcile. Undeposited Funds solves that: the three payments wait there, and on Friday one deposit moves all three into the bank. Now the books and the statement show the same single line.

The same is true for card sales. A processor usually pays out a day's sales as one batch, less its fees, so a batch payout is a deposit of several payments too (see how to record card payments and fees).

How money moves through it

Two steps, two entries. When you receive a payment against an invoice:

When you make the deposit, the payments move to the bank together:

Notice that the deposit itself is not income. The income was recorded when you made the invoice (or the sales receipt, for a sale paid on the spot). The deposit only moves money from one asset account to another. That point is behind most Undeposited Funds problems.

How it goes wrong

An Undeposited Funds balance that keeps growing almost always has one of these causes:

• The deposit was entered as new income. Someone recorded Friday's $5,460 as a deposit to a sales account, instead of grouping the three payments. Now the income is counted twice (once on the invoices, once on the deposit) and the payments sit in Undeposited Funds forever. This is the most common and the most expensive mistake, because it overstates income you pay tax on.
• A bank transaction was matched to the wrong thing. When bank lines are downloaded or imported, a deposit can be accepted as a new deposit when it should have been matched to the payments waiting in Undeposited Funds. Same result as above.
• The payment was entered twice. One copy was deposited, the other waits forever.
• The payment never arrived. A payment recorded from a promise ("the cheque is in the mail") that never came, or a cheque that bounced and was never reversed.
• Old balances from another program. Data brought across from previous software sometimes arrives with payments marked undeposited even though they were banked years ago.

Clean-up, step by step

Work oldest first, and do it with your bank statements open. You are trying to answer one question for each payment: did this money reach the bank, and if so, which deposit was it part of?

1. Reconcile the bank account first, as far as you can. A reconciled bank account tells you which deposits really happened. If the bank account is not reconciled, fix that first: see how to reconcile a bank account.
2. List what is waiting. Open your deposit screen or run the Undeposited Funds register, and list every payment with its date, customer and amount.
3. Match each one to a bank deposit. Most will add up to a deposit on the statement. Group them into a deposit with that date and amount.
4. Find the doubled deposits. If a bank deposit was already entered on its own as income, and the payments that make it up are still waiting, delete or void that stand-alone deposit and replace it with a deposit made from the waiting payments. Income drops back to the right figure, and Undeposited Funds goes down by the same amount.
5. Void what never happened. A payment entered twice, or one that never arrived, is voided. The invoice it paid opens again, which is correct: the customer still owes it.
6. Handle bounced cheques properly. A cheque that came back should be reversed so the invoice is open again, and any bank fee recorded as an expense.
7. Take what is left to your accountant. Very old amounts you cannot trace, especially from before you started using your current software, are a question for your accountant. A journal entry may be right, but which account it hits depends on whether that income was already taxed.

Do not clear an old Undeposited Funds balance with a journal entry just to make it zero. If the real problem is a doubled deposit, that entry leaves your income overstated and hides the evidence.

Habits that keep it at zero

• Deposit the way the bank does. One deposit in the books for each deposit slip, each card batch and each mobile deposit. Tick exactly the payments on that slip.
• Take card fees out in the deposit. Record the batch at its full amount, with the processor's fee as a negative line to a fee expense account, so the deposit equals what reached the bank.
• Check the balance every week. At month-end, Undeposited Funds should hold only the last day or two of receipts. Anything older is a question.
• Skip it when it does not help. If each customer pays by bank transfer and each transfer is its own line on the statement, receiving straight into the bank account is simpler.

In AcboBooks, a setting in Company Settings decides whether Receive Payment and Sales Receipts deposit to Undeposited Funds by default. Make Deposit lists every payment, sales receipt and customer deposit waiting there, with nothing ticked to start, so you tick the ones on the slip (or Select all). A "Less merchant fee" line takes a card processor's fee out of the same deposit, and you can print a deposit slip. A deposit made from waiting payments cannot be edited; you void it and make a new one, and voiding sends its payments back to Undeposited Funds. Books Checkup lists every payment that has waited more than 14 days.

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