The “Use Undeposited Funds as a default deposit to account” preference under Sales and Customers account preferences is the QuickBooks default setting. The Undeposited Funds account is a special holding account (within the “other current assets” section of the balance sheet) that is created by QuickBooks automatically and is used to track customer/client payments. So, instead of recording each individual customer receipt as a single deposit entry in the operating (checking/cash) account, customer payments are collected and placed in the Undeposited Funds account until the actual deposit is made at the bank. QuickBooks reduces the balance in Accounts Receivable and increases the balance in Undeposited Funds account.
When the actual deposit is made at the bank, the customer payments collected in the Undeposited Funds account can be grouped together and recorded as deposits in QuickBooks so the number on the bank deposit matches what was recorded in QuickBooks. QuickBooks then reduces the Undeposited Funds account and increases the appropriate operating account.
When using the “Group with other Undeposited Funds” option, this makes the reconciliation of bank accounts easier by matching what has been recorded in QuickBooks with that which has cleared on the bank statement. Without using this option, each deposit would be entered in the register piecemeal, thus making bank reconciliation a significant time-consuming nightmare.