Clearing Undeposited Funds

Clearing Undeposited Funds

If your Undeposited Funds Ledger Account shows a balance when all cash and checks for online transaction orders have been deposited, you will need to record correcting entries in your ledgers to Clear the remaining balance in the Undeposited Funds Account.


This issue may occur when:
Cash or checks already applied as a payment towards an online order get recorded in error as a deposit using ‘Receive Misc. Payment’ INSTEAD of recording the deposit using ‘Bank Deposit’. The posting to the Main Checking Account will still be correct, BUT the income ledger account will be double posted and a balance for cash and/or check will remain in the Undeposited Funds account.
Example of how this can happen:
  1. Susan makes an online purchase for a $25 yearbook and pays by check.
The correct procedure - 
1) When a check (or cash) is applied as payment towards an online order, the following entry is automatically posted to the ledger accounts:
  1. Increase Undeposited Funds by $25
  2. Increase Yearbook income by $25
2) The next step after applying the payment will be to record a ‘Bank Deposit’.  This will move the funds out of the Undeposited Funds ledger account and into the Main Checking account to record that the deposit has been made at the bank.

The following transaction is posted as a result of the ‘Bank Deposit’
  1. Increase Main Checking Account by $25
  2. Decrease Undeposited Funds by $25 
Result:
  1. Checking account balance increased by $25
  2. Yearbook income increased by $25
  3. Undeposited Funds account balance increased by $25, THEN decreased by $25 when the funds were transferred into the checking account, to bring the balance to $0.
Where the mistake can occur - 
When the $25 check is given to the treasurer to deposit, in error the check is then recorded as a deposit using ‘Receive Misc. Payment’, INSTEAD of ‘Bank Deposit.’ The following entry would be recorded in the ledgers:
  1. Increase Main Checking by $25
  2. Increase Yearbook income ledger by $25
There is now a duplicate $25 posting to the Yearbook income ledger – Once when the check was applied as payment towards the order (as above in Step #1) and again when the check was recorded as a deposit using ‘Receive Misc. Payment’.

Result:
  1. Checking account balance increased by $25
  2. Yearbook income increased by $25
  3. Yearbook income is double-booked ($25 increase from online order + $25 through ‘Rec. Misc. Payment), AND the Undeposited Funds account has a remaining balance of $25 because it was never moved out of Undeposited Funds and into the checking account (as above in Step #2)

To correct the ledger accounts for the above example: 

1)  Record a deposit using ‘Bank Deposit’ to move the $25 remaining funds from the Undeposited Funds ledger account into the Main Checking account. 
  1. Go to Summary > Bank Deposit.
  2. At Deposit to Account field, select Main checking account.
  3. Select the $25 check from the list of checks being held in Undeposited Funds.
  4. Select ‘Record Deposit.’
2) Make an adjusting Journal Entry to correct double booking of income, and zero-out the extra deposit to the  Main Checking Account that was just made.
  1. Go to Accounting > Journal Entry.
  2. At Transaction type, select Decrease.
  3. Originating account will be Main Checking account (as it is now temporarily double booked from making the prior entry in Step 1.)
  4. Distribution account will be Yearbook Income, $25 decrease.
Result:
  1. Main Checking account is correct ($25 increase and $25 decrease) with a zero effect to the balance.
  2. Yearbook income ledger is decreased by $25 to correct the double posting of income error.







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