The Undeposited Funds account is something of a blessing and a curse of Quickbooks Online. If you know how it functions and what it's used for, it can save you some time with your work. But, if you don't understand it, then you'll wind up giving yourself a headache trying to sort out the resulting mess it creates. That's why we're going to go over what purpose it serves in your bookkeeping endeavors.
Undeposited Funds is an Asset account in Quickbooks, meaning it is something that is to the benefit of the company. The account exists only within QBO to record payments you receive from Sales or Invoices, which will later be deposited into the bank account. Once those deposits are made and come in through the Bank Feeds, the user will then match the amounts into QBO, which will clear it out.
Quickbooks automatically uses it for receiving payments on Invoices and Sales Receipts, but most users don't realize that. That causes a problem when the deposit comes in through the Bank Feeds and they receive the payment rather than matching it. Specifically, it ends up inflating their income and making it appear as though they were paid twice, which quickly becomes an issue with larger balances.
When this happens, someone has to either undo those deposits and then properly match them, or clear out the excess in both the Income and Undeposited Funds. Not only is it a time-consuming process since you can't use Journal Entries to correct the account, but it can be expensive in the long run. Not just because you have to pay someone else to correct it, but in taxes, because you're overstating your income.
So if you are using the Invoices or Sales Receipts or Third-Party Software that makes use of it, make sure that you match the deposits when they come into the bank account for payments. It gets tricky when you deposit a greater sum to encompass more than one payment, in which case you need to use the Split function to divide it. Likewise, if you end up getting short-changed or an overpayment, both of which can hinder the matching process, you need to know how to handle those issues individually.
In the end, Undeposited Funds is useful because it takes some of the work out of what needs to be done manually. But, because it isn't explained properly, it paradoxically causes problems that require more time and effort to fix. If your account is inflated, don't just leave it alone or else it'll cause you larger headaches in the long run.
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