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Mysteries of the Unknown: Undeposited Funds, Retained Earnings, Unapplied Cash Payment Income, Unapplied Cash Bill Payment Expense in QuickBooks Online

Mysteries of the Unknown: Undeposited Funds, Retained Earnings, Unapplied Cash Payment Income, Unapplied Cash Bill Payment Expense in QuickBooks Online

If you are like most small business owners who are excellent at your given trade (and your given trade is most definitely NOT accounting), you might have mistaken the title of this article for a foreign language that is possibly extinct and uninterpretable… These Account Names often appear in your QuickBooks Online file without you ever having set them up and they are considered mysteries to many non-accounting type business owners.

I can guarantee you that even though you did not ask them to appear in your QBO file, they do have a purpose and they might even unlock some random mystery for you as to where all the money goes in the business.

Undeposited Funds

Whenever you input the receipt of a payment from a customer, QuickBooks automatically enters the payments into the Undeposited Funds folder.  Essentially, this folder ends up becoming a storage bin for any incoming cash and check payments that haven’t yet been deposited into the bank.  This first part is easy to remember but what gets confusing for most do-it-yourselfers is that you need to record a MATCH in your QBO Bank Feed with the income received and marked as PAID against an invoice.  That said, you may forget to go to the bank for a few days and by the time you get there, you are depositing several checks at once.

Most banks will just record the deposit transaction as a whole, meaning it is the grand total of the multiple checks deposited on that deposit slip.  When it gets read into your QBO file, it is up to you to MATCH the checks deposited on that deposit slip to the grand total in your Bank Feed.  What often happens instead is that you take the amount that is showing as a DEPOSIT in the QBO Bank Feed and you mark it to Sales of Product.

Sadly, you have just double reported income.  At Reconciled Solutions, when we take on a new bookkeeping client, they often have a problem with duplicate entry on INCOME for this very reason.  Last year, we had a new client who had overstated their income by $850,000 and had already filed taxes against that total income.  We worked to clean up their Undeposited Funds Account and as a result, they had to file an amended return.  They were thrilled at the opportunity to file an amended tax return because as a result, they were $850,000 less profitable than they had originally thought.  No wonder they thought that they were being taxed unreasonably!

Retained Earnings:

Quickbooks Online posts Retained Earnings automatically from year to year and it does not allow you as a user to make changes to the Retained Earnings Account.  This is a good thing because Retained Earnings represents the cumulative total of profit or loss of the business over the lifecycle of the business.  So if you started your business in 2019 and you had a $30,000 net income at the end of the first year on your profit and loss, then your Retained Earnings on the Balance Sheet would be +$30,000.  In 2020, there was this little thing called a Global Pandemic and you ended up finishing the year down by $50,000.  Your Retained Earnings would show -$20,000 at the beginning of 2021 since the Retained Earnings are the cumulative total, not the year-end total.  Now let’s say that in 2021, you manage to get things back on track and you end up having a net income of +$13,000 at year end 2021.  What do you think your Retained Earnings would be?  You guessed it… $30,000 – $50,000 + $13,000 =  -$7000.  This -$7000 in Retained Earnings after year three of business will continue to ebb and flow as the business profits ebb and flow.  It is wonderful to understand that the way we are able to impact Retained Earnings in a positive manor is by continually showing a profit in your business.

 

Unapplied Cash Payment Income and Unapplied Cash Bill Payment Expense

These two accounts with their long, confusing names will appear on your Profit and Loss in QBO typically at a time when you have been sloppy with the use of calendar dates in the bookkeeping process.  One of the most wonderful ways to manage cash for a small business is to fully utilize the Accounts Receivables and Accounts Payables Reports.  There are basically 2 ways to manage vendor expenses in QBO:  either we enter the expense after-the-fact, based on the bank feed posting OR we pre-plan for our expenses by way of setting up a Bill and once paid, posting a Bill Payment.  I will always prefer the latter method because – even if it takes more time to enter – I have the ability to see what Bills are upcoming and how it will impact my cash balance if I pay it today versus waiting longer.  I always want to know that I have enough cash in the bank to cover all my upcoming expenses.  Let’s say you just received a Bill from your utility provider, ComEd, for $382.44 and it is due in 28 days.  It is very important that your bookkeeper enters the accurate Bill Date and Due Date on the bill, because if you accidentally reversed them, then you would likely end up with an Unapplied Cash Bill Payment Expense.  The Due Date was on 04/08/21 but the bookkeeper accidentally posted the Due Date as 03/10/21.  When the payment is made, with ample notice of the Due Date on 04/02/21, that nasty Unapplied Cash Bill Payment Expense will post on your Profit and Loss because now you have paid a Bill that has not even been billed yet!

On the income side, I see this happen with frequency because sometimes small business owners are not very good about getting their Invoices out to their clients.  However, our good client is so anxious to pay the supplier for the goods and services received, they send a payment in advance of receiving an Invoice.  So let’s say you have been hard at work for your good clients, Smith Auto Body, and you have a verbal agreement that they need to pay you $3500 for your work on their job.  You are so busy doing the work that you don’t take time to send them the invoice for the $3500.  They, in turn, are so pleased with the work you have been doing that they send in payment for $3500.  If you go into your QBO Clients List and apply a payment received of $3500 today, March 12th, but you do not get around to creating the Invoice for Smith Auto Body until next week, March 17th, you have just created yourself a balance in the Unapplied Cash Payment Income account.  To reverse this, please change the date of the Invoice to BEFORE you received the payment from the customer and the rest will take care of itself.

However, I can’t let this go without telling you that as a small business owner, your most important job is making sure that the Invoicing of Clients is going out on time and accurately, because, as you know, Income is the lifeblood of the business.  In order for your business to be successful, you HAVE to find clients and book Income.  It does you absolutely no good to work all day on your client’s job, only to forget to invoice them.  Invoicing is your most important job so one MUST have processes and systems developed for systematic and consistent invoicing.

Angie Noll
angien@reconciledsolutions.net