What are undeposited funds?
When a business receives cheques or cash from several customers and banks them together, the bank statement shows one combined deposit. Recording each payment directly to the bank account would make [bank reconciliation](/glossary/bank-reconciliation) difficult. An undeposited funds account (sometimes called a clearing or cash-in-transit account) solves this.
How it works
- Customer payment received: debit undeposited funds, credit [accounts receivable](/glossary/accounts-receivable).
- Payments deposited together: debit bank, credit undeposited funds.
Example
A shop receives three cheques on Monday for $200, $350 and $450, and deposits them together on Tuesday. Each payment goes to undeposited funds. Tuesday's $1,000 deposit moves the total to the bank account, matching the single $1,000 line on the bank statement.
Card payment clearing
The same idea is used for card and online payment processors, which pay out a batch of sales minus fees. A clearing account helps separate gross sales, processor fees and net payouts.
Common problems
- Payments left in undeposited funds that were actually deposited, leading to duplicated or missing income
- A growing, unexplained balance
Review the account during every [month-end close](/glossary/month-end-close); it should usually contain only recent, genuinely undeposited items.