Undeposited Funds is an internal other current asset account created by QuickBooks Desktop to hold funds until you are ready to deposit them. It serves as the default Deposit To account when you receive payments, use a payment item on an invoice, or enter a sales receipt.
If you use Undeposited Funds:
Note: If you're not using Accounts Receivable functions such as invoices and payments, or if you take individual payments to your financial institution (rather than a batch of payments), you can bypass the Undeposited Funds account by going directly to the Make/Record Deposits window.
If you don't use Undeposited Funds:
Income is recorded through an Invoice and a Deposit. If a Payment for an Invoice is in Undeposited Funds but a Deposit is recorded separately, income will be overstated. You can correct this by deleting the separate Deposit and moving the Payment from the Undeposited Funds. However, if the Deposit is in a previous accounting period and cannot be changed, you can remove the Payment from the Payments to Deposit window. To do so, you need to create a zero deposit using the overstated income account.
Important: Before removing payments from the Undeposited Funds account, make sure to consult your accountant and back up your company file.
If you need to see which payments have not been cleared/deposited yet, you can customize the Undeposited Funds QuickReport.