Undeposited Funds, explained for online stores

Undeposited Funds is the account in QuickBooks where money sits after a customer has paid you and before it reaches your bank. For a shop with a till, that is the cash drawer before the bank run. For an online store, it is the few days between a card payment and the payout that carries it.

Why an online store needs it

Card processors and marketplaces don’t pay each sale on its own. They batch sales into payouts, take their fees and any refunds out, and send one amount. If each payment goes straight into your checking account in QuickBooks, your register never matches the bank: QuickBooks shows the sales one by one, the bank shows the batches.

With Undeposited Funds in between:

each payment is recorded when the customer pays, so the invoice shows as paid;
each payout becomes one deposit that gathers its payments (and subtracts fees and refunds);
the deposit equals the line on your bank statement, so reconciling takes minutes.

Reconciling WooPayments payouts in QuickBooks Desktop walks through one payout step by step.

When Undeposited Funds has grown out of hand

The usual signs: a balance of thousands of dollars that never goes down, payments from months ago still listed in Make Deposits, and bank reconciliations that are off by amounts nobody can explain.

It almost always comes from one of three habits:

Payouts entered as new deposits (or as a bank feed match) instead of deposits of the waiting payments. The money is counted twice: once waiting in Undeposited Funds, once in the bank.
Some payments sent straight to checking, so later deposits come out short and someone “fixes” them with an adjustment.
Refunds and fees left out, so deposits never quite equal the bank and the leftovers pile up.

Cleaning it up

Pick a cut-off date you have reconciled to, and work forward from there, one payout at a time.
For each payout, open the processor’s list of the transactions in it. Make the deposit from the waiting payments and refunds it names, with the fees as a minus line, so it equals the bank line.
If that payout was already entered in some other way (a direct deposit from the bank feed, say), don’t add a second one: change the existing entry so it deposits the waiting payments instead of an income or adjustment line.
What is left after every payout is matched is genuinely waiting, or genuinely wrong. Check those one by one with your accountant.

It is slow by hand. If your store runs on WooCommerce and QuickBooks Desktop, NemoWorks Sync can regroup past payouts that were put straight into the bank, and shows you each one to approve before it changes anything (paid plans; see Fixing past payouts).