There is an account on the balance sheet called Undeposited Funds and it holds 84,300. It held 71,000 last year and 52,400 the year before.
It has never gone down. Not once, in four years.
That is not an asset. That is a symptom, and what it is usually telling you is that revenue has been counted twice.
What the account is actually for
Undeposited Funds is a holding account. It exists to bridge the gap between receiving a payment and depositing it, which matters when a client takes six cheques on Tuesday and walks them to the bank as one deposit on Friday.
The bank shows one deposit of 9,400. The books need to show six payments against six different invoices. Undeposited Funds is where the six payments wait so they can be grouped into the one deposit that will appear on the statement.
Used that way it is genuinely useful, and its balance at any moment should be small: whatever has been received but not yet taken to the bank.
The correct sequence, and the one that actually happens
Done properly it is three steps.
Invoice recorded. Debit accounts receivable, credit income.
Payment received. Debit Undeposited Funds, credit accounts receivable. The receivable is cleared, the money is sitting in the holding account.
Deposit recorded. Debit the bank, credit Undeposited Funds. The holding account clears to zero.
What happens instead is that the third step gets entered as a plain deposit straight into an income account. Debit bank, credit income. It reconciles against the bank statement perfectly, which is the reason nobody catches it, and the bank reconciliation is the only control most small clients have.
Now trace the revenue. It was recorded once when the invoice was raised. It was recorded again when the deposit was entered. Income is overstated by the amount of the deposit, and Undeposited Funds still holds the payment that was never cleared.
Do that routinely and the account grows by roughly the amount of the double counted revenue, year after year, which is why the balance only ever climbs.
The other ways it gets stuck
Not every stale balance is double counted income, and the fix depends on which one you have.
Payments recorded, deposits never entered at all. The client receives payment in the software and physically banks the money, but never records the deposit anywhere. Undeposited Funds grows and the bank account is understated. The bank reconciliation would catch this, which tells you the client is not doing one.
Duplicate payment entries. A payment applied twice against the same invoice, once correctly and once into the holding account. Accounts receivable goes negative somewhere to compensate.
A genuine year end timing difference. Payments received on 30 December and banked on 2 January. This is the account working exactly as intended, and the balance should be small and should clear in the first days of January.
That last case is why you cannot simply write the balance off. Part of it may be real.
How to work out which one you have
Open the account detail, sorted by date, for the full life of the balance.
Real deposits in transit are days old. Anything older than the first week of January is not in transit and needs explaining. Age the balance and the shape of the problem usually announces itself: a long tail of small stale items points to the double counting pattern, while a few large old items point to deposits that were never recorded.
Then take the stale items and look for the matching bank deposit. If the money arrived in the bank and was posted to an income account, you have double counted revenue. If the money arrived in the bank and was never recorded, the bank account is wrong instead.
Do not just plug it
The temptation at 9pm in March is to journal the balance to an expense account or to retained earnings and move on. Resist it, for two reasons.
The first is that you do not yet know what you are writing off. If the balance is double counted revenue, the correcting entry reduces income, and the client has been overpaying tax for years. That is a conversation worth having and possibly an amended return, not a plug.
The second is that a plug does not stop it happening again. The balance rebuilds next year because nothing about how the client records deposits has changed. The genuinely useful part of this work is the five minute conversation with the bookkeeper about using Make Deposits rather than entering deposits directly.
One caution on the correction itself. If the return is prepared on the cash method, money received is income when it is received, whether or not the client got around to depositing it. Do not assume that clearing Undeposited Funds always reduces taxable income, because on a cash basis client the timing of the deposit is not what matters.
Where Ledger IQ fits
This is a problem that hides because nobody is forced to look at the account.
Undeposited Funds has no natural home on a tax return. It is not really an asset in any meaningful sense, and there is no line on Schedule L that wants it. When you upload the trial balance to Ledger IQ and start mapping, that account has to be assigned to something, and there is no obvious answer. The mapping review will not let you export while it is unreviewed, so the question gets asked out loud rather than deferred.
That forcing function is most of the value. A stale balance that would otherwise ride along as other current assets becomes a decision you have to make in January.
Once you know what it is, the correction goes in as a numbered adjusting or reclassifying entry against the accounts it belongs to, visible on the Working Trial Balance with its own detail rather than disappearing into a total. Next February the entry is still there with its description, so the person who picks up the file can see that the balance was investigated and what it turned out to be.
And because year over year rollforward puts last year's balances beside this year's, an Undeposited Funds account that has grown again is visible as a swing rather than as a number nobody compares.
Ledger IQ supports Forms 1065, 1120S and 1120, with exports for Drake, Lacerte and UltraTax CS. It is free during early access, so you can try it at portal.ledgeriq.ai on a live client without a credit card.