How undeposited funds works
When a payment is received in the office, whether by check, cash, or card, it is recorded first against the customer's invoice, then held in undeposited funds until it is grouped with other payments and taken to the bank as a single deposit. This mirrors how deposits actually happen physically, as a batch rather than one transaction at a time, so the accounting matches the real-world timing of the trip to the bank.
The account needs to be reconciled against actual bank deposits regularly, since payments recorded but never batched into a deposit will sit in undeposited funds indefinitely and make the account balance meaningless. A bookkeeper matches each bank deposit back to the specific payments that made it up, clearing the undeposited funds balance as deposits happen and confirming no payment was recorded twice or missed entirely.
Example
A business receives three customer checks on Monday: $800, $1,200 and $650, each recorded against its invoice and held in undeposited funds. On Tuesday, all three are combined and deposited at the bank as a single $2,650 deposit. The bookkeeper records the bank deposit as a transfer out of undeposited funds, bringing the account back to zero for those payments.
Undeposited funds in QuickBooks Online vs Xero
QuickBooks Online uses undeposited funds by default whenever a payment is recorded without immediately selecting a specific bank account, then offers a bank deposit screen to batch payments together. Xero handles this with a similar setting for receiving money, though many Xero users route payments directly to a bank account instead.
Common mistakes
- Recording a customer payment directly to the bank account instead of undeposited funds, which creates a duplicate deposit once the actual batch is recorded and thrown off the reconciliation.
- Letting payments accumulate in undeposited funds without regularly matching them to actual bank deposits, which makes the account balance meaningless and hides whether a payment was ever really deposited.
- Batching the wrong combination of payments into a deposit, which leaves some payments matched incorrectly and others stranded in the account indefinitely.
Why it matters
An unreconciled undeposited funds account can overstate cash a business thinks it has collected, which matters to an owner deciding whether payroll or a vendor bill can be paid this week. It also complicates a bank reconciliation, since the software cannot match a batch deposit to the bank feed if the underlying payments were recorded incorrectly. Keeping the account clean gives an accurate view of collected cash at all times.
Related terms
How LedgerBPO handles undeposited funds
We reconcile undeposited funds to actual bank deposits every cycle, matching each batch back to the individual customer payments that made it up. This prevents old, unmatched payments from sitting in the account and distorting your cash position.