Does the Undeposited Funds account have to be used? Best practice says, “Yes it should.”
Think about how you normally handle payments. After a check or cash payment is received, is the payment taken directly to the bank? Or is it stored in a bank bag, safe, desk drawer, etc. until it’s taken to the bank for processing? More often than not, the payments are stored for a later time.
The Undeposited Funds account represents that bank bag or safe used to store the payments until the deposit is prepared and taken to the bank. If it helps – rename the account. For example: Bank Bag or Payments Received.
This concept can also be applied to credit card payments – as quite often there are multiple credit card payments that make up the bank deposit, not just one. After the payments are received into the Undeposited Funds account in QuickBooks, a deposit can be created to group the payments together and form one bulk deposit.
If the Undeposited Funds account is used, then the deposits recorded in QuickBooks will typically match the bank statement, making reconciling the account much easier.