What Are Undeposited Funds and How Do They Work?
Understand undeposited funds: money your business has received but not yet banked. Learn how to track and manage these amounts for accurate financial records.
Undeposited funds represent money a business has received but not yet physically placed into its bank account. This accounting concept helps maintain accurate financial records and ensures a company’s internal books align with its bank statements.
Understanding Undeposited Funds
Undeposited funds are amounts a business possesses from transactions not yet formally deposited into its bank accounts. Think of these as payments sitting in a company’s cash drawer or a holding bin before being taken to the bank. This temporary status means the business has received the payment, but it is not yet reflected in the bank’s balance.
Businesses often accumulate these funds for a short period, perhaps to combine multiple smaller payments into a single, larger bank deposit. This practice simplifies the deposit process and helps match internal records to bank statements. Undeposited funds are temporary and always intended for deposit.
Sources of Undeposited Funds
Undeposited funds can originate from common business activities. Cash payments directly received from customers for goods or services are held by the business until a bank deposit is made.
Checks received from customers are another source. Until these checks are physically delivered to the bank and processed, they remain as undeposited funds. Electronic payments also contribute; for instance, credit card payments processed through a merchant service provider may not settle into the business’s bank account immediately. The time delay means these funds are “received” by the business’s system but not yet “deposited” by the bank.
Managing Undeposited Funds
Businesses account for undeposited funds internally using a holding account within their accounting system, often named “Undeposited Funds.” This account acts as a temporary clearing account, holding payments from the moment they are received until they are deposited into the bank. The purpose of this account is to accurately track money from the point of receipt to its actual banking.
The accounting process involves two steps. First, when a payment is received, it is recorded as an increase to the “Undeposited Funds” account. Second, when the accumulated funds are physically deposited at the bank, the accounting system records a transfer from the “Undeposited Funds” account to the actual bank account. This ensures the business’s records reflect both individual payments received and lump sum deposits made to the bank.
Reconciling Undeposited Funds
Management of undeposited funds aids bank reconciliation. These funds often create a “timing difference” between a business’s internal financial records and its bank statements. For example, a business might record a payment as received today, but the bank statement will not show that deposit until it has been processed, possibly a day or two later.
During bank reconciliation, these undeposited amounts must be identified and accounted for to match the company’s books with bank records. The process involves ensuring that the total of individual payments recorded in the undeposited funds account matches the combined deposit amount on the bank statement. Accurately tracking these funds simplifies reconciliation, helping businesses confirm that all received money has been properly deposited and recorded.