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How to Fix a Balance in the Undeposited Funds Account in QuickBooks

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My last article “What is the Undeposited Funds Account in QuickBooks?” explained exactly what this account is.  I’ll explain in this article how to fix a balance that should not be in the account.  It is okay to have a balance in the account.  The amount of the balance should equal the amounts of deposits that have not yet been deposited at the bank or recorded in your file.

If the balance is unusually large then you have a problem that needs fixed.  And it’s fairly easy to fix, but before telling you how to fix it, I’m going to tell you why you have this problem so you won’t repeat the steps that caused this problem.  When you receive a payment, the undeposited funds account is debited with that payment.  When you make a deposit (either from the icon on the home page or under the banking menu) the undeposited funds account is credited for the amount of the deposit.  If you skip this step, the undeposited account will not be credited and the amount keeps getting bigger and bigger.

But, you know you made all your deposits because you have reconciled your bank account.  And your account balanced, all deposits are accounted for.  But, how did you add the deposits?  Did you add them directly into the register?  Or did you bypass the pop up window that shows all the deposits and enter the deposit directly into the deposit window?  Although this will debit your bank account, which is what you want, it will not credit the undeposited funds account, which is what you also want.  The account that you probably picked when making the entry is an income account.  After all, it would make sense to increase your sales with a deposit.  However, this is incorrect.  Your sales have already been increased when you created the invoice or sales receipt.

Now your sales are overstated.  It looks like you made more sales than you actually did.  Time to fix this.  Click on the Record Deposits icon on your home page. (Notice the progression from Receive Payments & Create Sales Receipts on the flow chart).  A pop up window will open showing all payments that need to be deposited.  Mark the deposits that need fixed. DO NOT CROSS YEARS. Click OK.  On the next screen, make sure you are using the correct bank, enter the date for the transaction, in the From Account enter the income account the deposit is for, in the Amount column enter a negative dollar amount that is the same as the total of the deposits.  At the bottom of the window the deposit total will be zero.  Because the total is zero there is no effect on your bank account, but it does credit the undeposited funds account and debits the income account.

This is a fairly easy fix but can be more complicated depending on how many income accounts you have.  If you want the each income account to be correct you will have to research the deposits to see what income the payments were for.

The other complication may be the year(s) the deposits cover.  As I stated earlier, your income is overstated.  This correction to the undeposited funds account will reduce your income for prior years. If you have already had your taxes prepared for those prior years you will want to talk to your accountant or tax preparer.

One more piece of advice, make a backup before you do anything.  And please, don’t hesitate to contact me with any questions.