The Undeposited Funds (or Payments to Deposit) account balance should represent payments received from customers (whether by ACH, QBO payments, or Check) that have not yet been physically deposited into a bank account.
When this balance becomes very high and consists of transactions from previous years, it is almost always incorrect.
Why does this happen? And how do you clear out years of historical transactions without duplicating income or changing numbers in the closed periods?
In our Undeposited Funds post, we covered the account functions on a daily operational level, how payments are mapped, and the process of routine month-end reconciliations.
In this post, we will go through how to correctly clear a historical balance without impacting closed periods.
Before You Touch Anything
Prior-Year Tax & Closing Date Warning: Never delete old payments if the tax returns for those years have already been filed! Doing so will change prior-year numbers, break past reconciliations, and cause discrepancies between your financial records in QBO and filed tax returns.
Before starting any historical cleanup:
- Confirm the closed period: Identify the most recent year for which tax returns have already been filed.
- Set a Closing Date Password: In QBO, go to Settings → Account and Settings → Advanced → Accounting and set a closing date with a password to lock the closed period. This prevents the transactions in the closed periods from being updated accidentally.
Investigate the Balance
Before writing off or moving any balances, you need to determine whether the overstated balance represents duplicate revenue or uncollected payments.
Navigate to Bank Deposit and review the payments listed in the Select the payments included in this deposit table.
The two main scenarios behind an incorrect balance are:
- Scenario A (Most Common): The deposits in Bank Feed were added directly as income/sales revenue rather than matched to customer payments. As a result, revenue was double-counted in past years (first time through invoices, and second when the deposit was added).
- Scenario B: Invoices were marked as Paid, but the customer payment bounced, failed, or was recorded in error.
How to clear Undeposited Funds – Scenario A (Revenue Duplicated in Prior Years)
Before starting the clean up of the balance, you want to understand the tax implications and your options.
What About Taxes Already Paid on Duplicate Revenue?
If overstated Undeposited Funds were caused by duplicated revenue in prior years and the tax returns were filed based on those numbers, the business may have overpaid income taxes.
Here are the recommended steps to handle the situation BEFORE cleaning up the historical balance:
- Consult your CPA/Tax Preparer: Share the dollar amount of duplicated revenue for each tax year with the CPA.
- Amending Returns for a Refund: If the financial impact of duplicated revenue is material and within the statute of limitations, the CPA can file amended tax returns to reduce prior-year taxable income and claim a refund for overpaid taxes.
- Update QuickBooks Online: If tax returns are amended, update QBO accordingly so the financial statements in QBO match the final amended tax returns.
If the duplicated revenue amount is not material or you are not amending past tax returns, clear the historical balance using the steps below.
To clear out historical years without opening closed books or affecting current-year P&L, use a clearing account.
In Chart of Accounts (COA), create a new account named “Undeposited Funds Clearing Account” with the Other Current Asset type.
Go to Bank Deposit, and set the deposit date to the first day of the open tax year (e.g. 01/01/2026).
Check the boxes next to all historical payments that need to be cleared out. Note the subtotal of these selected payments.
Scroll down to the Add funds to this deposit section and select Undeposited Funds Clearing Account as the account and enter negative amount of subtotal from above, so the net deposit total at the top right equals $0.00.
After Step 2, Undeposited Funds balance will show $0.00 (or its true current balance). However, the Undeposited Funds Clearing Account shows a positive balance.
Because this balance represents duplicated revenue from prior closed years, it must be cleared against Retained Earnings with a journal entry:
Date: 1/1 of the open tax year (e.g. 1/1/2026)
Dr. Retained Earnings
Cr. Undeposited Funds Clearing Account
Once this entry is recorded, both the Undeposited Funds Clearing Account and historical Undeposited Funds balances will show $0.00.
Optional Final Step: Inactivate the Undeposited Funds Clearing Account to keep your COA clean and prevent accidental future entries.
How to clear Undeposited Funds – Scenario B (The Customer Never Actually Paid)
What if your investigation reveals that an invoice was marked as Paid, but the payment bounced, failed, or was marked as Paid in error? You can re-establish Accounts Receivable (open balance) in the current open period. Do not delete the original payment transaction as that will change prior year records.
Verify with the customer that the payment was never successfully processed and that the invoice balance is outstanding.
Create a journal entry dated 1/1 of the current open period:
Dr. Accounts Receivable
Cr. Undeposited Funds
Select the customer name in the Name field for both lines, so the entry links to the customer account.
In the Bank Deposit screen (dated 1/1), select the original pending payment and the journal entry from Step 2 (amount will show as negative). Save the zero-dollar deposit.
When the customer makes payment, go to Receive Payment, select the customer, and match the new payment to the journal entry from Step 2.
Need Help Fixing Historical QBO Books?
Cleaning up multi-year accounting errors requires thorough work to ensure your balance sheet remains accurate and your prior year records in QBO stay unchanged.
At MONO Bookkeeping, we offer historical cleanups as part of our ongoing monthly bookkeeping services. We partner with business owners to ensure your financial records stay accurate, organized, and reliable.
If you are ready for a reliable bookkeeping partner, schedule a consultation to discuss how we can support your business!