Mastering the Undeposited Funds Account in QuickBooks: What It Is, Who Should Use It, and How to Avoid Common Mistakes

Master the Undeposited Funds Account

If you've ever struggled to match your deposits in QuickBooks to your bank statement or wondered why your Accounts Receivable (A/R) reports are full of unpaid invoices even though you've been paid — you're not alone. One of the most misunderstood features in QuickBooks is the Undeposited Funds account.

This blog post will walk you through what the Undeposited Funds account is, how it works, when to use it, and how it helps with clean A/R reports and easier bank reconciliations — especially if you don’t deposit customer payments every day.

What Is the Undeposited Funds Account in QuickBooks?

The Undeposited Funds account is a temporary holding account in QuickBooks. It stores customer payments you’ve received but haven’t yet deposited into your actual bank account.

Think of it as a virtual cash drawer — a place where checks, cash, and electronic payments are collected until you physically go to the bank or until your processor batches the deposit.

This account is essential for grouping multiple customer payments into a single bank deposit — ensuring the deposit in QuickBooks matches your actual bank statement.

Why Use the Undeposited Funds Account?

Using the Undeposited Funds account gives you several advantages:

✅ It mirrors real-world banking — you collect multiple payments and then make one deposit.

✅ It makes bank reconciliation easier — grouped payments in QuickBooks match the actual deposit amounts.

✅ It improves Accounts Receivable (A/R) reporting — your customer balances and statements are accurate.

✅ It’s ideal if you don’t deposit funds daily — QuickBooks tracks what’s been received but not yet deposited.

Who Should Use It?

The Undeposited Funds workflow is perfect for businesses that:

Receive multiple payments before making a deposit

Accept cash, checks, or non-instant merchant payments

Use platforms like Square, PayPal, or Stripe that batch payments

Want accurate A/R aging and clean customer statements

Retailers, service providers, contractors, nonprofits, and e-commerce sellers can all benefit from using this feature properly.

How to Properly Record Transactions Using Undeposited Funds

Here’s the correct step-by-step workflow:

1. Receive Payment

When a customer pays an invoice, always use Customers > Receive Payment.

Apply the payment to the open invoice.

Choose Undeposited Funds as the "Deposit To" account.

🧾 This step relieves Accounts Receivable. It tells QuickBooks the customer paid and the invoice is no longer outstanding.

2. Make the Bank Deposit (When You Actually Deposit the Money)

When you physically deposit the payments into the bank — either by visiting the bank or through a batched electronic deposit — go to Banking > Make Deposits in QuickBooks.

Select the payments you just deposited.

Group them into a single deposit.

Match the total to your bank statement.

💡 This step should mirror your actual banking activity. If you received three checks and deposited them together, group them into one deposit in QuickBooks.

What Relieves Accounts Receivable in QuickBooks?

This is where many users get confused.

👉 The Receive Payment transaction is what officially relieves (reduces) Accounts Receivable in QuickBooks.

If you create an invoice, it increases A/R. When you Receive Payment, QuickBooks applies the payment to that invoice, reducing A/R and marking the invoice as paid.

❌ Skipping the Receive Payment step and entering a deposit directly to income will leave the invoice open and misstate your reports.

Why This Matters for Customer Statements

Using Undeposited Funds correctly is especially helpful when:

You don’t deposit payments daily

You want to send accurate A/R aging reports or customer statements

If you skip this workflow, your reports will show unpaid invoices (even though you were paid), confuse your customers, and distort your real income.

Common Mistakes to Avoid

🚫 Recording deposits directly to income without using Receive Payment

→ The invoice stays open and income is overstated.

🚫 Entering both a payment and a manual deposit

→ Creates duplicate income and messes up reconciliation.

🚫 Leaving payments in Undeposited Funds forever

→ Results in overstated A/R and open balances that should’ve cleared.

🚫 Posting merchant deposits without accounting for fees

→ Causes mismatches in deposits and income.

Best Practices for Clean Books

✅ Always apply customer payments using “Receive Payment”

✅ Use “Undeposited Funds” unless you’re depositing the payment immediately

✅ Make deposits in QuickBooks only when you deposit in real life

✅ Match deposits in QuickBooks to what appears on your bank statement

✅ Reconcile monthly and clear out old undeposited payments

Final Thoughts

The Undeposited Funds account is a simple but powerful tool — when used correctly. It helps you stay aligned with your real-world banking habits, ensures A/R stays accurate, and makes your bookkeeping cleaner and more reliable.

If you’ve been recording deposits manually, skipping the “Receive Payment” step, or seeing lingering customer balances that shouldn't be there — it may be time for a cleanup.

📞 Need Help Cleaning Up Your Books?

If your A/R is a mess or your deposits never seem to match your bank account, you’re not alone — and we can help. Our QuickBooks cleanup services will untangle your transactions, fix your Undeposited Funds account, and get your reports back on track.

👉 Contact us today to schedule a consultation and bring clarity to your books.