Quick answer: What is the undeposited funds account for?
The undeposited funds account is a short-term asset where customer payments wait after you collect them and before you bank them. When you record the deposit, the payments you picked leave the account together as one total — the same single figure your bank statement will show. A healthy balance is small and always explainable. Kantivo’s Make Bank Deposit screen lets you choose the waiting payments and subtract a processor’s fee in the same entry.
Picture a small bakery that sells at a Saturday farmers’ market. By closing time there is $640 in the cash box and two cheques from catering customers for $380 and $230. Nobody goes to the bank on a Saturday. On Monday morning all of it goes in on one slip — and the bank records $1,250 as a single deposit.
For the weekend in between, that money belonged to the bakery but sat in no bank account. The undeposited funds account exists for exactly that gap. Below we walk through how it works using the bakery as the example, how to handle the weekly card payout that arrives already short of fees, and what to do when the balance in undeposited funds climbs and won’t come back down.
The Gap Between Getting Paid and Getting to the Bank
Getting paid and banking the money are two separate events, and often days apart. The moment a customer pays, the sale is settled and anything they owed is cleared. But until the deposit happens, the cash is in a box, a drawer or a processor’s pending balance. Undeposited funds is the ledger’s version of that box.
Saturday’s market
in the books
Monday’s statement
What type of account is undeposited funds?
It is a current asset, normally set up as Other Current Asset and listed beside your bank accounts on the balance sheet. Nothing is owed and nothing is pending from the customer’s side — the money is yours and is merely in transit. You may see it under another name elsewhere; QuickBooks Online, for instance, has displayed it as “Payments to deposit.” The bookkeeping underneath doesn’t change.
Why Not Post Every Payment Straight to the Bank?
You could, and the bakery’s ledger would then show three deposits — $640, $380 and $230 — against a bank statement showing one of $1,250. Come bank reconciliation, nothing pairs off neatly, and you are left adding up combinations of receipts to work out which ones made up which deposit. Multiply that by a year of market weekends and the reconciliation becomes the job nobody wants.
Routing the receipts through undeposited funds keeps both views accurate. Each payment is recorded against the right customer or sale, and the deposit is recorded as the one figure the bank actually saw.
When should a payment skip undeposited funds?
Whenever it reaches the bank on its own. A client who pays by bank transfer produces one payment and one statement line, so post it directly to the bank. Undeposited funds is for payments that get bundled before they land.
| Payment | Record it to | Reason |
|---|---|---|
| Market-day cash takings | Undeposited funds | Banked later, in one go |
| Several cheques on one paying-in slip | Undeposited funds | The statement shows a single total |
| Weekly card processor payout | Undeposited funds | Many sales settle together, minus fees |
| One bank transfer from one client | The bank account | Already one payment and one line |
The Two Entries Behind Every Deposit
Every payment that uses undeposited funds passes through it in two moves. The first happens when the money is received. For the market’s cash sales, recorded as a sales receipt:
| Account | Debit | Credit |
|---|---|---|
| Undeposited Funds | $640.00 | |
| Bakery Sales (Income) | $640.00 |
The two catering cheques pay invoices already issued, so their credit side is accounts receivable rather than income — but they land in undeposited funds just the same. After Saturday the account holds $1,250.
The second move is Monday’s deposit, one entry that draws on all three receipts:
| Account | Debit | Credit |
|---|---|---|
| Business Checking | $1,250.00 | |
| Undeposited Funds | $1,250.00 | |
| Totals | $1,250.00 | $1,250.00 |
The holding account returns to zero, the bank shows the exact amount the statement will show, and nothing touches income a second time. Income was booked when the sale happened; the deposit just relocates cash. (New to debits and credits? Double-entry bookkeeping explained covers the idea quickly.)
When the Processor Keeps a Slice
The bakery also takes cards at the market, and its processor pays out weekly after deducting fees. Say a week brings in $2,000 of card sales and the processor’s charges come to $64 (an illustrative figure — your own statement has the real one). The bank receives $1,936.
How do I record a card payout after the processor takes its fee?
Keep each card sale at the full amount the customer paid. When the payout lands, record a single deposit that picks up that week’s card payments and subtracts the fee on its own line:
| Account | Debit | Credit |
|---|---|---|
| Business Checking | $1,936.00 | |
| Merchant Fees (Expense) | $64.00 | |
| Undeposited Funds | $2,000.00 | |
| Totals | $2,000.00 | $2,000.00 |
Sales stay at what customers actually spent, the processor’s cut shows up as a cost you can watch, and the deposit agrees with the bank to the cent. Booking the sales at the net figure instead quietly erases both your true revenue and your true cost of taking cards. For the fee side in more depth, see recording merchant fees when your processor pays you net.
When Undeposited Funds Won’t Clear
A balance that keeps rising nearly always has the same story behind it: the payments were received into undeposited funds, but the cash reached the bank through some other entry. Bank feeds are the usual culprit. The deposit shows up in the feed, someone accepts it as new income rather than matching it to the payments already waiting, and now the money exists in the books twice — once stranded in undeposited funds, once as income that was already recorded.
A swollen undeposited funds balance is seldom money that went missing. Far more often it is money counted twice — and your income is overstated by exactly that amount.
Why won’t my undeposited funds balance clear?
Work through it in this order:
- Print the contents. Every payment still sitting in undeposited funds, oldest first, with its date, customer and amount.
- Locate each in the bank. Look for the deposit that contains it, usually a few days after the payment date.
- See how that deposit was entered. If it went in as fresh income, that entry is a duplicate. Remove it and re-record the deposit so it draws on the waiting payments.
- Chase what remains. A payment with no matching bank deposit is still on hand, was entered by mistake, or is genuinely missing — each needs a different fix.
- Leave the journal entry for last. Expensing the whole balance “to tidy it up” leaves the duplicate income untouched and overstates profit. Correct what actually happened.
A habit for every month-end: during your monthly close, open undeposited funds and put a name to every payment in it. Anything more than a week or two old should already be in the bank — and the paying-in slip is far easier to find this month than next spring.
How Kantivo Handles Undeposited Funds
The trouble with this account is that it never complains — it just grows. That makes it exactly the kind of thing software should keep in order for you.
- Customer payments and sales receipts can both be received into undeposited funds, while staying linked to the customer and invoice they belong to.
- The Make Bank Deposit screen lists everything waiting to be banked. Tick the payments on the slip, choose the bank account, and Kantivo posts one deposit for the total.
- A “Less fee withheld” line on that same screen covers processors that pay out net. Enter the fee and its expense account, and the deposit matches the payout while sales remain at full value.
- Reconciliation falls into place, because each deposit in the books is the same single amount that appears on the statement.
- A genuine double-entry ledger underneath keeps undeposited funds, receivables and the bank in agreement; an unbalanced entry never posts in the first place.
One Deposit. One Match. No Mystery Balance.
Bundle the week’s payments into a single deposit, take the processor’s fee out as you go, and reconcile against a statement that agrees with your books. Desktop accounting at one flat annual price — not a monthly bill that grows at every renewal.
Start Free 30-Day Trial Try Live DemoFrequently Asked Questions
What does undeposited funds mean?
Money a customer has already paid you that hasn’t yet gone into the bank. The undeposited funds account holds those payments — cash, cheques or a card batch — until you record the deposit, which moves them into the bank as one total, exactly as the bank will show it on your statement.
What type of account is undeposited funds?
A current asset, usually set up as Other Current Asset beside your bank accounts. The payment is complete and the money is yours; it’s only waiting to be banked. So a healthy balance is modest and short-lived — cash and cheques on hand plus any card settlements that haven’t landed yet.
When should a payment skip undeposited funds?
When it reaches the bank by itself. A single transfer, wire or ACH payment already appears as its own statement line, so post it straight to the bank. Use undeposited funds only when several payments will be combined into one deposit — a batch of cheques, a till’s takings or a card payout.
Why won’t my undeposited funds balance clear?
Usually because the money reached the bank through a separate entry rather than a deposit drawing on the waiting payments — most often a bank feed line accepted as new income. The original payments stay stuck and the same cash is counted as income twice. Matching each deposit to its payments fixes both at once.
How do I record a card payout after the processor takes its fee?
Keep each sale at full price in undeposited funds. When the payout arrives, record one deposit that picks up those payments and deducts the fee on its own line, coded to a merchant fees expense account. The deposit then equals what reached the bank, revenue reflects what customers paid, and the fee is visible as a cost.
Is it safe to clear undeposited funds with a journal entry?
Not as a first step. If the balance is payments banked but recorded twice, the duplicate income needs removing — expensing it away leaves profit overstated. If the money truly never reached the bank, it needs investigating, not hiding. Work through the stuck payments oldest first and correct each one according to what actually happened.
Where This Leaves You
Stripped down, the idea is simple: undeposited funds holds money you’ve collected but not yet banked, and every deposit you record should empty some of it. One entry when each payment arrives, one when the deposit goes in — that’s the whole mechanism.
Send bundled payments through it, let single transfers go straight to the bank, and glance at the balance every time you close a month. If every dollar in it has a name, the account is working. If it doesn’t, look first for a deposit recorded twice — it’s nearly always the answer, and a lot cheaper to find now than at tax time.
Related Articles
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- How to Reconcile a Bank Statement (Without Losing an Evening)
- How to Record Merchant Fees When Your Processor Pays You Net
- How to Record Customer Deposits Without Inflating Your Revenue
- How to Close Your Books Every Month: A Small Business Month-End Routine
- How to Account for Petty Cash: Starting the Fund, Topping It Up and Counting the Box
- Internal Controls for Small Business When You Only Have Three People
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