Batching and balancing transactions with an "undeposited funds" account

If you process batches of transactions or transactions, that offset each other such as sales income and a credit card processing fee, the transactions which are shown on your bank statement may become hard to reconcile with the transactions you have recorded in Wave.

When this happens, consider using an 'Undeposited Funds' Account to clarify your transactions.

What is an 'Undeposited Funds' Account, and how do I create one?

An 'Undeposited Funds' account is a notional, or imaginary, payment account that you can use to track the detail of transactions without confusing what you show going into and out of your real bank account(s). (Because this payment account is imaginary, you can call it whatever you like, but accountants have long referred to it as 'Undeposited Funds', so we'll stick with that for this explanation. You can also create several different 'imaginary' accounts and give them different names if that helps you to understand your bookkeeping.)

You create an 'Undeposited Funds' account exactly the same way you would create any other Bank Account in Wave — here's a reminder, if you haven't done that in a while. (You can create your Undeposited Funds account as any type of Bank / Cash account, but 'Other Bank' probably makes the most sense.)

OK, I now have an 'Undeposited Funds' account. What can I do with it?

Now you have your Undeposited Funds' account, let's see how it can help clarify your bookkeeping.

Problem 1: Batches of Checks

Imagine you have received five checks from your customers for five different invoices. You record these payments in Wave, marking the payment account as 'Checking'. If you now switch to Transactions and filter to just your Checking account, you will see the five individual transactions. Let's say they are for $100, $200, $300, $400 and $500 ($1,500 in total).

After lunch, you drive down to the bank and deposit the checks. The cashier enters them as a single amount.

Later, when you are reconciling your bank statement, you see a deposit of $1,500, but you don't have a matching $1,500 transaction in Wave. Instead, you need to find the five individual transactions that make up this amount.

This is hardly the end of the world, but it is not as clear as it could be. Wouldn't it be nice if there was a way to have Wave and your Bank 'agree' that there was a single $1,500 deposit into your Checking account?

Solution: 'Undeposited Funds' Account to the Rescue!

Let's travel back in time before you recorded the payments on your five invoices, and start again, using our Undeposited Funds Account.

  1. Record each invoice payment, making the Payment Account your Undeposited Funds account. When you are done, if you filter your Transactions List to show just your Undeposited Funds Account, you should have five transactions, for a total balance of $1,500.
  2. Now add a sixth transaction - a withdrawal ('Expense' transaction) of $1,500 from your Undeposited Funds account. This is going to be the 'from' side of a transfer to your Checking account.
  3. Next, add another transaction for a deposit ('Income' transaction) of $1,500 paid into your Checking Account.*
  4. Finally, on your Transactions list (remove the filter, if you did in fact filter to show just Undeposited Funds Account transactions when we discussed that above!), select the check-boxes next to the $1,500 expense from your Undeposited Funds Account and the $1,500 income in your Checking account, and click the 'Transfer' button to mark these two transactions as two sides of a transfer.
  5. If you filter to show your Checking Account transactions, you'll see only the $1,500 transfer, which matches the $1,500 you're going to see on your bank statement. But if you want to see the detail, your Undeposited Funds Account holds the individual transactions

* Note: If you have your Checking account linked to update Wave automatically, you might want to skip this Step 3 and just wait for the deposit transaction to import automatically before completing Step 4.  Alternatively, you can proceed as above, and simply delete the duplicating deposit transaction when it imports from your bank. 

Problem: Merchant Fees and Bulk Transfers

You receive payments via an external credit card processing account (i.e. not Wave Payments, which handles this automatically). You want to keep track of all the payments received and the merchant fees on each payment.

You are recording the gross payments into your Checking account as income in order to record your sales income correctly, and the merchant fees as Expenses from your Checking Account. Your card processor is depositing the net amount after fees, which makes finding and reconciling transactions more difficult. Often your card processor batches payment for several transactions (net of fees) together into a single deposit, which makes it even harder to reconcile.

Solution: 'Undeposited Funds' Account to the Rescue!

Similar to the solution for batching checks, use an Undeposited Funds account to track detail transactions and record only the actual value of transfers into your Checking account.

  1. As you take card payments, record the gross card payment amount as income and the merchant fee as an expense into your 'Undeposited Funds' account.
  2. When your card processor settles the transactions to your bank, create a withdrawal ('expense') transaction in your Undeposited Funds account.
  3. Create a deposit ('income') transaction into your Checking account to record receipt of funds from your card processor.
  4. On your Transactions list, select the check-boxes next to the withdrawal (expense) from your Undeposited Funds Account and the deposit (income) in your Checking account, and click the 'Transfer' button to mark these two transactions as two sides of a transfer.
  5. If you filter to show your Checking Account transactions, you'll see only the net transfer (in this case $611.13, which matches the amount you're going to see on your bank statement. But if you want to see the detail, your Undeposited Funds Account holds the individual transactions.

Note: The method outlined here does a great job of ensuring the transactions recorded in your checking account exact match up with what you see on your bank statement but at the price of additional bookkeeping steps. If you're more concerned about saving time on your bookkeeping and do not mind having additional 'netting' transactions show up in your bank account in Wave, then follow these steps to record your credit card deposits.

Remember you don't have to call your 'Undeposited Funds' account 'Undeposited Funds'. You can create as many 'imaginary' payment accounts as you like, and call them whatever you want. So if you find it easier to have an account called 'Credit Card processing', go ahead and do that!

What else can I do with an 'Undeposited Funds' Account?

There are no rules what you can do with an 'Undeposited Funds' account. Simply, if you find it easiest to break down your transactions in your 'Checking' account (or whatever you call your 'real' bank account) and live with the extra complexity when you reconcile your statements, do that. But if you find it easier to keep your 'real' bank transactions clean - exactly matching the amounts you see on your bank statement - using one or more 'Undeposited Funds' style accounts is going to be very helpful.

Be creative, and do what feels most convenient for you!

Tip: Be sure to Zero your 'Undeposited Funds' Account!

If you look back at the examples given above, you'll notice that at the end of each 'cycle' of steps, all the money recorded as deposits into the 'Undeposited Funds' account is withdrawn back out and transferred to a 'real' bank account.

This is a key principle of working with an 'Undeposited Funds' account: as you complete your bookkeeping, the balance of the account returns to zero. Check regularly that you are not leaving unintended balances in your 'Undeposited Funds' account to keep your bookkeeping accurate!

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