Undeposited Funds Journal Entry Explained: Debit or Credit and How to Record It

Managing money flow in a business is more than tracking sales and expenses. One key part of bookkeeping is handling unsettled funds. A proper undeposited funds journal entry records payments received but not yet in the bank. If this is not done right, it can cause wrong balances, mismatched accounts, and errors during audits.

In this blog, we explain what uncleared funds mean, how journal entries work, whether undeposited funds debit or credit, and how to record them step by step.

Introduction to Undeposited Funds

What are Unsettled Funds in Accounting?

Unsettled funds are payments your business gets but has not yet put in the bank. These may be cash, checks, or online transfers. Until you deposit them, they stay in a temporary account called “unclear funds.”Making a correct journal entry for these funds helps you track all money received and keeps your books accurate.

Why Businesses Use Unbanked Funds

Many businesses receive several payments in one day but deposit them later as one total amount. Recording each payment directly to the bank can cause mismatches since the total deposit may not match individual receipts.

Using an unsettled funds account makes bookkeeping easier. It groups payments, avoids errors in bank records, and improves tracking for future checks.

Understanding Undeposited Funds Journal Entry

Meaning of Undeposited Funds Journal Entry

A journal entry for undeposited funds is a record in your books that shows money received but not yet in the bank. It keeps track of incoming payments until they are deposited. This ensures the amount in your records matches the actual deposits made to your bank account.

Importance of Accurate Recording

Accurate recording of uncleared funds helps you:

• Avoid double-counting payments
  
• Keep your cash account and bank account reconciled
  
• Maintain correct income reporting
  
• Simplify end-of-month bank reconciliations
  

A journal entry for undeposited funds tracks money you have received but not yet deposited in the bank, making it easy to follow pending payments.  It helps you track payments until they are deposited safely.

Journal Entry for Undeposited Funds

Basic Structure of the Journal Entry

A typical journal entry for undeposited funds involves two main accounts:

• Debit: Uncleared Funds (Asset account)
  
• Credit: Accounts Receivable or Sales Revenue
  

This shows that your business has received money but has not yet moved it to the bank. Once you make the bank deposit, the entry shifts from the uncleared funds account to your bank account, keeping your records accurate.

Examples of Recording Uncleared Funds

Example 1:

• A customer pays $500 in cash for services.

   

• Entry:
  • Debit: Uncleared Funds $500
    
  • Credit: Accounts Receivable $500
    

Example 2:

• Later, you deposit $1,500 from multiple customer payments into the bank.

• Entry:
  • Debit: Bank Account $1,500
    
  • Credit: Pending Funds $1,500
    

Example 3: Card Payment through Payment Gateway

• Imagine you receive $1,200 via an online gateway, but the funds are not yet in your bank account. You still record it as pending deposits. Later, when the gateway transfers money, you move it to your bank account.

This process ensures no gaps or duplicates occur between payment receipts and bank deposits.

Undeposited Funds: Debit or Credit?

When to Debit Uncleared Funds

• You debit Pending deposits when you receive money from customers but have not yet put it in the bank. This shows a rise in your temporary cash balance.

Example:
Payment received: $1,000
Journal Entry →

• Debit: pending Funds $1,000 
• Credit: Accounts Receivable $1,000

When to Credit Uncleared funds

• You credit the Uncleared funds when you move the money from the Uncleared funds account to your bank account. This shows that the holding account has reduced because the funds have been deposited.

Example:

• Deposit made: $1,000
• Entry: Credit Unsettled funds $1,000
  

Common Mistakes to Avoid

• Recording deposits directly to the bank account instead of using Uncleared funds first
• Forgetting to clear the Uncleared funds account after making a deposit
• Mixing customer payments with other sources of funds

Using proper undeposited funds journal entries prevents these issues and keeps your records clean.

How to Record Unsettled Funds Effectively

1. Record Each Payment:

Each time a customer pays, log the amount in the Uncleared funds account instead of adding it straight to bank income. This keeps pending deposits separate and avoids wrong balances later.

2. Verify Payment Details:

Check that every payment matches the invoice, including the amount, date, and method used. This avoids duplicate entries and keeps records clean and correct.

3. Group Payments into Batches:

If you get many payments in one day, combine them into one batch deposit entry. This way, your records match the actual bank deposit, making reconciliation easy.

4. Create a Transfer to Bank:

 When you make the bank deposit, post a journal entry to move the total from Uncleared funds to your bank account. This keeps your books updated and accurate.

5. Reconcile Often:

Compare your bank statement with the uncleared funds account regularly. This helps you spot missing deposits, wrong amounts, or posting errors early on.

6. Use Accounting Software:

Tools like QuickBooks or Xero make tracking uncleared funds simple. They automate entries, save time, and reduce mistakes from manual bookkeeping.

Tips to Avoid Errors in Entries

• Use software to record Uncleared funds fast and right.
• Check each payment well before you note it.
• Keep slips or proof for all cash you get.
• Do not post the same pay twice or miss a deposit.
  

By doing these steps, your notes for Uncleared funds stay true. This makes bank checks easy and cuts errors in audits.

Common Issues with Uncleared Funds and How to Resolve Them

Duplicate Transactions

This occurs when a payment is recorded twice, once in Uncleared funds and again directly in the bank account. It inflates income records. Always log payments first in Uncleared funds, then transfer after deposit.

Incorrect Debit or Credit Entries

Confusion over whether to debit or credit undeposited funds can cause account imbalances. Debit the account for incoming funds and credit it only after you move the money to your bank.

Uncleared Balances in uncleared funds

Sometimes, entries are left uncleared even after a bank deposit is made. This shows false pending balances. Review this account weekly and clear all deposits to keep records accurate.

Mismatched Bank Deposits

If you deposit a different amount than what’s recorded in uncleared funds, your statements won’t match. Always check totals before batching payments to avoid confusion and extra work later.

Delayed Recording of Payments

Late posting of payments can create cash flow errors and make reconciliation harder. Record every payment as soon as you receive it to ensure real-time accuracy in your accounting system.

Lost or Missing Documentation

If you don’t keep receipts or payment details, it’s hard to track uncleared funds later. Always attach payment proofs or notes to each journal entry for clear audit trails.

Many businesses struggle with duplicate payments, wrong debit or credit postings, and uncleared balances. 

Meru Accounting Helps You

• Accurate Journal Entries: Our experts ensure every payment is recorded correctly, avoiding costly errors.
• Debit and Credit Management: We handle all postings with precision, preventing mismatched accounts.
• Bank Reconciliation: We make sure uncleared funds always match your actual deposits.
• Customized Accounting Solutions: Whether you use QuickBooks, Xero, or other tools, we tailor processes to your needs.
• Time Savings: We handle the entire process so you can focus on growing your business.

FAQs

1. What is an undeposited funds journal entry?
   It is a record of money you get from customers but have not put in the bank yet. It acts as a safe spot to hold funds until you make a deposit. This helps keep your books neat and matched with bank records.

2. Are undeposited funds a debit or credit?
   You debit this account when you get money from a client. You credit it when you move the money to your bank. This shows where the money goes at each step.

3. Why is using unposted deposits important?
   It helps you match your books with what is in the bank. It stops double posts, wrong totals, and errors in reports or tax files.

4. How do you record a journal entry for uncleared funds?
   Debit the unposted deposits account when you get paid. Credit sales or accounts receivable. Later, credit the unposted deposits and debit your bank when you make the deposit.

5. What happens if uncleared funds are not cleared?
   Your books will show wrong cash amounts. This can make reports false, harm cash flow data, and cause mistakes during checks or audits.

6. Can uncleared funds be negative?
   Unposted deposits should not show a negative balance. A negative amount usually means an entry mistake or a missed payment record. Checking and correcting the entries fixes the issue.

7. Do all businesses need unposted deposits tracking?
   Yes, any business that takes multiple payments before making a single bank deposit benefits from unposted deposits tracking. It makes bookkeeping smooth and keeps deposits matched with customer receipts.