Undeposited Funds in QuickBooks Online look harmless, but it is one of the fastest ways to throw off your cash flow, overstate income, and confuse your reports. When this account is not handled correctly, your profit and loss and balance sheet stop lining up with your actual bank activity, which makes it harder to make smart decisions for your small business.

At Saved By The Books, we work with Undeposited Funds all the time during cleanups and ongoing bookkeeping. In this article, we will break down what this account really is, why it exists, how it gets messy, and practical steps to clean it up. We will also show how Undeposited Funds fits into the chart of accounts in QuickBooks, so your financials finally match what is happening at the bank.

What Undeposited Funds Really Are and How They Work

Undeposited Funds is a temporary holding account in QuickBooks Online. Think of it as a virtual cash drawer your customer payments pass through before they hit your bank account. It sits on your chart of accounts in QuickBooks as an asset account, just like your checking account, but it is not an actual bank.

Here is the basic workflow when it is used correctly:

• You create an invoice and receive a payment, or you create a sales receipt.  

• Instead of posting that money directly to a bank account, QuickBooks puts it into Undeposited Funds.  

• When you take a batch of those payments to the bank, you use the Bank Deposit screen to group them into a single deposit that matches what shows up on your bank statement.  

This is especially helpful when your bank deposits multiple customer payments together, such as cash and checks from a day of sales or credit card batches processed by your merchant service provider. If you skip Undeposited Funds and send every payment straight to the bank account in QuickBooks, you may end up with a lot of small deposits in your records that do not match the larger combined deposits showing in your bank feed.

There are times when posting directly to the bank account is fine, such as a single ACH payment that appears as its own deposit on the statement. The key is matching your workflow to what actually happens at the bank. Understanding that Undeposited Funds is an asset account connected to your chart of accounts in QuickBooks helps keep payments organized and prevents guesswork later.

Common Causes of Undeposited Funds Messes

Most Undeposited Funds problems start with small habits that snowball over time. We regularly see issues like:

• Skipping the Record Deposit step after receiving payments, so Undeposited Funds just keeps growing with old items.  

• Duplicating deposits by receiving a payment to Undeposited Funds, then manually adding a separate bank deposit instead of using the Bank Deposit screen.  

• Posting customer payments directly to income instead of receiving them against invoices, which bypasses Undeposited Funds and breaks the link between sales and deposits.  

• Creating deposits without matching them to existing payments, so income gets counted twice.  

Bank feeds can add another layer of confusion. When the bank feed shows a deposit and you add it as new income, instead of matching it to existing Undeposited Funds payments, you end up with double-counted revenue and a lingering balance in Undeposited Funds that never clears.

Apps and payment processors can also create extra noise. Systems such as Shopify, Stripe, and PayPal may send individual transactions into QuickBooks while your bank only shows the net deposit after fees. If the integration is not set up to work cleanly with your chart of accounts in QuickBooks, you might see a lot of Undeposited Funds entries that do not tie neatly to deposits, plus separate entries for fees that are hard to reconcile.

How to Clean up Undeposited Funds the Right Way

Cleaning up Undeposited Funds is part detective work and part alignment with your bank records. We recommend a patient, step-by-step approach.

Start with a review:

• Run a report on the Undeposited Funds account from your chart of accounts in QuickBooks.  

• Change the date range to “All dates” and look for very old items that clearly should have cleared.  

• Drill into each transaction to see whether it is connected to a customer payment, sales receipt, or bank deposit.  

Next, compare to your bank statements and existing reconciliations. Ask: Does this payment appear in a deposit already? Was it recorded twice, once as a payment and once as a separate bank deposit? Are there deposits that were manually entered instead of created through the Bank Deposit screen?

Use the Bank Deposit screen to cleanly group and clear items that truly belong in a deposit. Select the payments sitting in Undeposited Funds that match a single bank deposit, then save. The goal is for each deposit in QuickBooks to match a real deposit on your statement, both in date and total amount.

Along the way:

• Fix duplicates by deleting or voiding the extra version of a transaction, not both.  

• Be cautious with past periods, especially ones that have already been reconciled or reported for tax purposes.  

• Check how changes affect sales tax reports and customer balances.  

Undeposited Funds cleanup can impact multiple parts of your books at once: income, accounts receivable, sales tax, and bank reconciliations. When balances have been off for a long time, it is often safer for a Certified Advanced QuickBooks Online ProAdvisor to step in and create a plan that unravels problems without breaking what is already correct.

Setting up Your Chart of Accounts to Avoid Future Issues

Undeposited Funds is not just a random account sitting on its own; it is part of your overall financial system. When your chart of accounts in QuickBooks is clean and intentional, Undeposited Funds works smoothly in the background instead of becoming a mystery bucket.

We focus on tailoring the chart of accounts in QuickBooks to how your business actually makes and receives money. That can include:

• Separating different income streams so reporting is meaningful.  

• Setting up specific accounts for merchant fees, refunds, and discounts.  

• Making sure Undeposited Funds is active and properly categorized as an asset account.  

This structure helps your sales, fees, and deposits flow logically from customers to Undeposited Funds, through bank deposits, and into your checking account balance. When your accounts are organized around your real workflow, the Bank Deposit screen becomes a simple matching exercise instead of a guessing game.

Good structure is supported by good routines. We encourage small business owners to build simple habits that keep Undeposited Funds from getting out of control. That means having clear steps for how front office staff receive payments, how often deposits are recorded, and how the person doing the books reviews open items.

Quick Checklist to Keep Undeposited Funds Under Control

To keep Undeposited Funds tidy going forward, use a simple recurring checklist tied to your regular bookkeeping schedule.

Daily or weekly:

• Receive every payment correctly, applying it to the right customer and invoice.  

• Use Undeposited Funds for payments that will be grouped into a single bank deposit.  

• Use the Bank Deposit screen to batch those payments so each deposit in QuickBooks matches the bank.  

Monthly:

• Run a detail report on Undeposited Funds and look for items older than your usual deposit timing.  

• Clear legitimate items with Bank Deposits, or fix duplicates and errors.  

• Reconcile your bank accounts so you can confirm that deposits, fees, and refunds all line up.  

Consistent workflows, a chart of accounts in QuickBooks that reflects how your business actually operates, and ongoing support from a bookkeeping professional all work together to prevent Undeposited Funds from turning into a long-term problem. When this account is under control, your cash flow reports make sense, your income is not overstated, and your decisions can be based on numbers you trust.

Get Your QuickBooks Accounts Organized With Confidence

If setting up or cleaning up your chart of accounts in QuickBooks feels overwhelming, we can take that off your plate so you can focus on running your business. At Saved By The Books, we structure your books so your reports are accurate, clear, and ready for informed decisions. Reach out with your questions or to get started and let us handle the details so you do not have to second-guess your numbers. Contact us to schedule a time that works for you.