Four Mistakes Users Make When Receiving and Depositing Payments

I have a lot of respect for the developers who have designed QuickBooks to make it easy for us not just to record customer payments but to deposit checks and reconcile our bank statements.

Let's take a look at a common sequence of events when we receive a customer check.  We record the customer payment to an invoice and set the check aside until it is convenient to run to the bank, which might not be today. Sometimes, we get another customer payment in before we have made it to the bank.  We record that payment and now have multiple checks to deposit. 

QuickBooks allows us to post customer payments to a holding account called "undeposited funds", which is another term for our
desk drawer.  When we are ready to run to the bank, we select "Record Deposits" and let QuickBooks do the additions if multiple checks are involved, print a deposit slip for the total to be deposited, and record the transfer from undeposited funds to our bank account.  This assures that we do not count checks in our drawer as deposited in our bank account until we actually deposit the checks.  It also assures that our deposit date and amount will match the amounts on our bank statements, which makes bank reconciliations easier.  I have depicted below how QuickBooks handles this process.

When receiving customer payments the normal "Deposit to:" account should be set to "Undeposited Funds"

Users can require that all payments are posted to undeposited funds by setting it in the company preferences for Sales & Customers’  I have described below four common errors that QuickBooks users make and how to fix them.

Error 1: Customer payments recorded directly to bank account instead of undeposited funds.

To correct this error:

1. Clear the “Use Undeposited Funds as a default deposit account so that the “Deposit to” drop-down list displays in the receive payments window.
2. Edit the original payments in the “Receive Payments” window
3. Select “Undeposited Funds” from the “Deposit to” drop-down list
4. Group the payments from Undeposited Funds in the “Record Deposits” window to match the actual bank deposits.

Error 2: Undeposited Funds Overlooked when making deposits

If there is a large balance in undeposited funds, the user may have used “Receive Payments” ands recorded receipts to the “Undeposited funds” account and, then, entered the same payments as deposits in the account register or in the “Record Deposits” window. As a result, payments are recorded twice, which overstates income and assets.

There are two methods to correct this error

Method 1 – Correct each deposit individually

1. Find the original duplicate deposits in QuickBooks
2. In the “Make Deposits” delete the erroneous deposits.
3. Click “Record Deposits” window and add the correct deposits from undeposited funds.

Method 2 – If a lot of transactions are involved a single, zero-sum entry can be made.

1. Use the “Record Deposits” window to select all of the payments in the undeposited funds account
2. Add an additional line to indicate the income account that has been overstated and enter a negative number for the portion of the deposit attributable to the current year.
3. Add another line, if necessary for any portion attributable to prior years, select “Retained Earnings” from the account drop-down list and enter a negative number for the balance.

Error 3: Customer payments entered directly into a deposit

If paid invoices still show up on a client’s open invoices report, they probably have not used the “Receive Payments” window to record the payments and apply them to the invoices. Instead, the client deposited the payments using the “Record Deposits” window, or entered them directly to the bank account register, naming an income accounting. As a result, the invoice remains open and income is overstated.

There are two methods to correct this error

Method 1 – Replace the incorrect deposits

1. Find the original deposits
2. Delete the erroneous entries
3. Re-enter the checks using the “Receive Payments” window and move the money into “Undeposited funds”.
4. Assemble the payments back into the original deposits from the “Record Deposits” window.

Method 2 – Change the incorrect account on the deposit

1. Change the accounts named in the original deposits to “Accounts Receivable”
2. Apply credits to the invoice using the “Receive Payments” window

Error 4: Payments or credits not applied against invoices

Correction

1. Run the “Open Invoices” report to find unapplied credits. You can set the report preferences to show negative numbers in red and within parentheses to make them easy to spot.
2. Once you have identified which customers have unapplied credits, you can use the “Receive Payments” window to apply the credits to specific invoices.

Robert Guild is certified QuickBooks ProAdvisor in Austin, TX who conducts CPE courses for CPAs and individual training and group classes to QuickBooks users.  His company Accounting Insight maintains a sixteen station QuickBooks lab, providing hands on training.  You can contact him directly at rguild@accountinginsight.biz