How do I refund a payment which is still in Undeposited Funds?

Hi there, @justdave72.

Here are some steps to record the refund transaction in QuickBooks Online (QBO). In your case, we can follow the bounced check process to create a record, and balance your accounts.

First, we have to unlink the payment to reopen the customer invoice transaction. This way, we can associate it with the new payment check of the customer. Before that, let's ensure you have turned off the automation to automatically apply credits to avoid applying credits to the next invoice you create for the same customer. Then, proceed with the steps below:

1. Go to the Sales menu and navigate to the All Sales tab.
2. Locate the payment transaction associated with the invoice and hit Edit.
3. In the transaction window, review the amount and uncheck it.
4. Click Save and Close, and select Save as credit from the prompt window.

Second, we can create a Journal Entry (JE) to match the bounced check from the Undeposited Funds (UF). Doing so will offset and balance the account. Here's how:

1. Click the + New icon and select Journal Entry.
2. From the Account field, Credit the Undeposited Funds and Debit the Accounts Receivable. Make sure to enter the same amount from both accounts to what amount is in the check. If you're unsure about using a JE, you can consult your accountant for guidance.
3. Select Save and Close.

Now the previous payment will show as an unapplied entry. In this, we'll have to match this to the JE we recently created using the Receive Payment option. I added a visual reference below.

Lastly, don't forget that QuickBooks offers various financial reports that can provide insights into your business. Here are some resources that can help:

• Run reports in QuickBooks Online
• Customize reports in QuickBooks Online

Know that the Community always has your back whenever you need assistance in recording payments in QuickBooks, @justdave72. I’ll keep this thread open for it so you can post it anytime you need help. Have a good one.

Okay, so now I have both the check that didn't get deposited and the journal entry listed in my "available to deposit" list when I create a new bank deposit. That only fixed the balance on Undeposited Funds, it didn't get the check out of the "to be deposited" list, which is back to my original problem. (And actually added a second bogus item to the undeposited list).

We appreciate your prompt and detailed response, justdave72. I can help you clear your Undeposited Funds account in QuickBooks Oline (QBO).

To clear both the check and Journal Entry (JE) from undeposited funds, create a deposit for the check and then modify the JE to credit your bank account. These actions ensure that your financial records accurately reflect the actual cash flow. I'll guide you through the process.

First, create a deposit:

1. Go to + New.
2. Select Bank Deposit.
3. From the Account dropdown, choose the account you want to put the money into
4. All transactions in your Undeposited Funds account appear in the bank deposit window, select the checkbox for the transaction you want.
5. Hit Save and close.

Next edit the journal entry. Here's how:

1. Open the Journal Entry you've previously created.
2. From the Account field, Credit the bank account you're using and Debit the Accounts Receivable.
3. Select Save and Close.

Despite these changes, please keep the JE and the bounced payment (unapplied payment) linked. You may refer to these helpful resources for more info on the topics above:

• Record a returned payment or bounced check in QBO
• A Guide to Creating a Profit and Loss Statement

For future reference, refer to this article on ensuring your accounts match your bank statements: Reconcile an account in QBO.

We want to help you make your financial processes easier and clearer. Please comment again if you have any questions about handling checks or running reports. We'll ensure you have a smooth experience with QuickBooks. Have a great day ahead!

Thanks!  This leaves a $0 deposit in the bank account, but that's fine since it doesn't affect the balance.

I found it not necessary to modify the journal entry. The fact of making the deposit moved the money in the records.

Not sure which message to mark as as the solution here as the entire solution was split over multiple messages and we don't have a specific one that contains the whole thing.  Maybe this one since it points out that you need to read the whole thread to get it.

@justdave72 

The response from QB employees is too complicated and incorrect.  The proper way to record it from an accounting perspective is to delete the payment in undeposited funds because it never happened and that will reopen the original invoice.  Then, receive payment on the original invoice.  The fact that the customer attempted to pay is irrelevant.  QB employees don't understand proper accounting and if you're not sure how to date the bounced payment and the journal entry, you will show income for a period of time when you didn't have any if you're on cash basis.  Also, their response doesn't address your desire to open a new invoice, so the easiest and most accurate thing to do it to just delete the original payment.  

OK, so with that in mind, I did not do exactly what they suggested.  But they gave me enough clues to get me where I needed to go. We are on accrual basis, so the original income date would still match.

Our normal procedure for dealing with bounced checks is to create a bill from the bank for the amount of the bounced check (with that line item going into a "bounced checks" category, which is a subcategory of "Bank Charges & Feels") plus the fee they charged as another line item, going into a "Bounced Check Fees" category, which is another subcategory of "Bank Charges & Fees". Both line items tag the customer in question. The bill then gets matched to the withdrawals from the bank when they reversed the deposit and charged the fee. We then create an invoice for the customer with Bounced Check and Bounced Check Fee items on it, which put the money back into those same categories.  The goal being that those categories will always have a zero balance as long as the customers pay off their invoices.

What threw that process for a loop this time was that the deposit technically didn't make it into a bank account, thus I couldn't create a bill from the bank to refund it. The journal entry suggestion above got me going in the right direction...  But the places they said to move the money aren't where it actually went.  Instead of transferring the money to the customer's A/R account from Undeposited Funds, I transferred it to the Bounced Checks category. From there, the rest of the process from the customer end was the same as we always do with bounced checks - they got a new invoice wth the "bounced" check listed (just no fee this time since the bank didn't charge one). The only hangup at this point was the leftover transactions hanging out in the "waiting to be deposited".  The single deposit (to "Cash on Hand" and not to the bank) with both the check and the reversal journal entry) of $0 cleared that out.

@RainflurryI replied to you but it didn't tag my reply as a reply for some reason, so it looks a little disjointed in the thread.