Tips for taking on a massive Undeposited Funds cleanup in QBO

If you’re looking for the best tips for taking on a massive undeposited funds cleanup in QuickBooks Online, this is the blog post for you. You may have recently taken on a QBO cleanup client and noticed that they have hundreds of old transactions in undeposited funds. Before you attempt to clean it up, let’s take a look at what you need to know so you can take on this project with confidence.

Click on the video link below to watch: Tips for taking on a massive Undeposited Funds cleanup in QBO

Tip #1: All transactions must be entered in QBO

First, when taking on a massive QBO cleanup, we have to make sure we’re working with all transactions, and that everything has been entered in QBO. I recommend starting out with all invoices, customer payments, and deposits. Then, you need to make sure that you work through the bank feeds to ensure that everything is entered before you can continue.

Tip #2: Reconcile business bank and credit card accounts

Once all transactions are entered in QuickBooks, the next step in your undeposited funds cleanup is to do all of the business bank and credit card reconciliations.

The reason we start with reconciliations is that even though we think we’ve entered everything in QuickBooks, the only way for us to know that we actually have entered everything is to ensure that all transactions are reconciled.

Also, by doing the bank reconciliations, you’ll make sure that you’re working with valid transactions and that there aren’t any duplicates or any transactions that don’t belong on the books.

Tip #3: Diagnose the cause of the problem

When we are working towards an undeposited funds cleanup solution in QuickBooks, we have to understand the fact that when we see a problem in the account, it is generally the symptom of a greater problem. We have to dig deep, find the real cause of the problem, and then we can identify a cleanup solution.

Here’s an example:

Imagine we are working with a company that provides consulting services. They invoice customers and receive payments via ACH, check, and QuickBooks payments. They enter customer payments into undeposited funds, as they normally should, but we see a problem.

Symptom #1: Whenever they go into bank deposits, they see that they have a lot of old unclear transactions in undeposited funds. There are various old transactions that haven’t cleared out of the bank deposit window.

Symptom #2: When examining the consulting income account detail, there are a lot of deposits recorded directly to income, when in fact there should only be invoices.

It’s clear to recognize that there is a problem, but what is the cause?

The number one cause is incorrect workflow. Usually the main cause of incorrect workflow is that deposits that are received in the bank are being entered directly to income.

Here’s a link to this topic in my video, if you’d like a visual example: [2:07 in the video]

Tip #4: Understand correct and incorrect workflows

That leads us to my next tip. We have to know how things work correctly before we can fix them. So what is the correct undeposited funds workflow?

The correct undeposited funds workflow

• Step #1: Start with a customer invoice.
• Step #2: A customer payment for that invoice is entered to undeposited funds.
• Step #3: A deposit is recorded to the correct bank account.
• Step #4: Match the deposit transaction in the bank feed.

In step #3 above, the deposit will increase the bank account and decrease undeposited funds. When the deposit is entered correctly, it takes the balance out of undeposited funds, and then in the bank feed or in the banking transactions, we match the transaction. That is how the correct workflow works.

Here’s a quick link to this part of my video: [3:17 in video], if you’d like to see a visual demonstration.

The incorrect undeposited funds workflow

But what about the wrong workflow? What exactly is causing the problem?

Generally, when there is an incorrect workflow, you’ll notice that you still started with a customer invoice, and then the customer payment is entered to undeposited funds. So far things are working correctly.

Where the workflow starts to fall apart is that deposits are added directly to income from the bank feed. That is what causes duplicate income.

How do you begin to notice that you have an undeposited funds problem?

A few things to watch out for, that would indicate a problem in undeposited funds include:

• Symptom #1: You will generally see that you have duplicate income.
• Symptom #2: You will find a growing balance in undeposited funds.

Tip #5: Find a cleanup solution

Once you’ve identified the cause, it’s time to fix the problem and restore things to the way they should be.

When it comes to an undeposited funds cleanup, there are two general methods that you can use. One is to fix the source transactions, and the other is what I call the dummy bank account method. Let’s go over these two options below, where you’ll also find the links to my video where I show you each option .

Option #1: Fixing transactions

The first option, to fix transactions, is the most accurate, but it’s also the most time consuming. In order to fix source transactions, you must have the source documentation. The source documentation refers to any information related to payment processor deposits. This could include copies of checks deposited together with a deposit slip, or information about the merchant payments that were received. Again, you have to have the source documentation; otherwise, you can’t fix the source transactions.

You must also be prepared to correctly record all invoices, sales receipts, customer payments, and deposits. As mentioned above, this is the most accurate method, but also the most time consuming, since it means you have to go back and ensure that all source transactions are not only recorded, but that they also reconcile to the bank deposits.

If you’d like to see this in my video, click on the following link: [5:32 in video]

Option #2: Dummy bank account method

The dummy bank account method, on the other hand, is potentially less accurate but it is a faster method of cleaning up undeposited funds. This is a quick way to handle an undeposited funds cleanup when source transactions don’t exist. Most of the time those transactions do not exist simply because anyone who’s doing their own books is generally not keeping track of all of their source documentation. This method is potentially less accurate because it assumes that income was duplicated.

Here is the workflow that you would follow if you use the dummy bank account method:

• Step #1: Start with setting up a dummy bank account in the chart of accounts in QuickBooks Online.
• Step #2: Make a deposit for old undeposited funds to the dummy bank account.
• Step #3: Enter an expense to an income account using the dummy bank account.

When you have followed the workflow above, the dummy bank account balance should be zero, due to the entries that you made, and income was decreased.

To see this in my related video, click on the following link: [6:18 in video]

A word of caution:

When implementing the dummy bank account method, you should make sure to consider the effect that adjusting any prior year undeposited funds may have. This includes considering how it may affect prior tax returns or the reconciliation to the tax return balance sheet.

Tip #6: How do I know when I’m finished?

My last tip is how to know when you’re finished with your undeposited funds cleanup. You’ll know you’ve cleaned up all of your undeposited funds when you can ensure that there are no old balances in undeposited funds.

Closing

I hope these tips for taking on a massive Undeposited Funds cleanup have answers your biggest questions and cleared up some of your doubts. If you’re still wanting to know more, click here to watch my video tutorial on how to clean up undeposited funds and implement the dummy bank account method. You can also click the following link to read the blog post that goes along with that video.

If a QuickBooks Online cleanup checklist is what you’re looking for, my Colossal Cleanup Checklist can be purchased on the 5MB Academy, and is designed to help you tackle your toughest cleanups. My 5MB Academy includes both free and paid resources for virtual bookkeepers, so make sure to check it out.

I also want to invite you to join my 5 Minute Bookkeeping Facebook community, and to follow me on Instagram for more helpful tips & tricks.

The post Tips for taking on a massive Undeposited Funds cleanup in QBO appeared first on 5 Minute Bookkeeping.