Why Your "Undeposited Funds" Account Might Be Overinflated—and How to Fix It

When I ran my local service business back in 2023, before transitioning to bookkeeping, one thing that always puzzled me was the "Undeposited Funds" account in QuickBooks. It consistently showed a balance that didn’t reflect reality. Even after hiring a bookkeeper, the issue persisted. Eventually, I realized the culprit: cash and check payments that weren’t properly accounted for.

This is a common issue for local service businesses, and it usually boils down to a misunderstanding of how QuickBooks handles deposits. When you receive cash or check payments from customers, those payments land in the “Undeposited Funds” account in your books. To move that money into your business checking account within your accounting records, a deposit must be manually created.

Here’s where the trouble begins: when you see a bank deposit in your QuickBooks bank feed, it’s tempting to simply match it with a customer payment or invoice. The software even encourages this approach. But doing so doesn’t move the payment from the “Undeposited Funds” account to your checking account in the accounting system. As a result, the undeposited funds balance keeps growing, creating an unrealistic picture of your finances.

How to Fix an Overinflated Undeposited Funds Account

If your “Undeposited Funds” account has been neglected for a while, cleaning it up can be a task. The best way to resolve it is to focus on the past calendar year, working through up to 12 months of records.

Here’s the process I recommend:

Start with the Earliest Payments: Begin with the oldest invoices marked as paid by cash or check that haven’t been matched to a deposit.

Compare with Bank Records: Look at your bank records for deposits around the same time. Identify which payments belong to which deposits. Keep in mind that a single deposit might include multiple payments from different customers.

Correct Errors: Some deposits might have been matched incorrectly, or payments may not have been deposited at all. Adjust these transactions one by one to ensure accuracy.

It’s a time-consuming process, but it’s worth it to get your books in perfect order.

Why Quick Fixes Don’t Work

Some bookkeepers might suggest creating a bulk journal entry to offset the “Undeposited Funds” balance. While this may seem like a quick solution, it often hides deeper problems. For example, there could be customer payments that were never deposited—cash left in a drawer, checks lost in a truck console, or even errors in recording payments.

Taking the time to review each transaction ensures you’re not leaving money on the table. It’s not just about correcting your books; it’s about uncovering potential revenue that might otherwise go unnoticed.

The Bottom Line

Cleaning up the “Undeposited Funds” account isn’t glamorous, but it’s essential for maintaining accurate financial records. More importantly, it gives you a true picture of your business’s cash flow, helping you make informed decisions. While it may take some effort, the payoff—both in terms of financial clarity and recovered funds—can be well worth it.