What is Undeposited Funds for?
It is a clearing account for money you have received and not yet taken to the bank. A payment goes in when the customer pays. It comes out when you record the bank deposit that contains it. Between those two moments the balance is real: it is the checks in the drawer.
The steps below are for bookkeeping software that records customer payments against invoices, which is where this problem lives.
Why does the balance stay?
Nearly every time, for one reason. The customer payment was received into Undeposited Funds. Then the deposit arrived from the bank feed and was added as new income, instead of being built from the payments that were waiting.
The result is two problems at once: income is counted twice, and the payment never leaves Undeposited Funds.
How do I confirm that is what happened?
- Open the Undeposited Funds register and look at the oldest items.
- Pick a payment that is months old where the money is clearly in the bank.
- Find that deposit in the bank account register.
- If the deposit is coded to an income account, you have found the duplicate.
How do I fix one in the open period?
Undo or delete the bank deposit that was coded to income. Then create the deposit from the waiting payments, so it comes out of Undeposited Funds, and match it to the bank line. Income is now recorded once.
How do I fix old ones in a closed period?
Do not change the old period. In the open period, make one deposit that:
- takes the old payments out of Undeposited Funds;
- adds a negative line to the same income account for the same total.
The deposit totals 0.00. It clears the account and reverses the doubled income without touching a closed month. Example with one old payment of 2,400.00:
| Deposit line | Account | Amount |
|---|---|---|
| Customer payment | Undeposited Funds | 2,400.00 |
| Reverse doubled income | Sales | -2,400.00 |
| Deposit total | 0.00 |
Write down what you did and why. If the doubled income was in a prior year, tell whoever prepared that year’s return.
How do I keep it clean?
One rule: a payment that goes into Undeposited Funds must leave through a deposit, never around it. If deposits arrive from a bank feed, match them to the waiting payments instead of adding them as income.
Undeposited Funds is a clearing account like any other, so it should be near zero at every period end.