Uncategorized income distorts revenue data and reduces the value of financial statements to internal and external stakeholders. Learn more about what it is, how to fix it in QuickBooks, and how tools like Keeper can streamline the cleanup process.
What Is Uncategorized Income?
Uncategorized income refers to income that has been recognized in accounting or bookkeeping software without being assigned to a specific account, such as Product Sales, dividends, or interest earnings.
Uncategorized income typically appears on the books when accounting software imports a deposit from a bank account or payment processor that it can’t match with an income category.
Source: Gentle Frog
For example, that could happen because the payment comes from a new customer or payment processor.
As a bookkeeper or accountant, fixing uncategorized income is a routine part of cleanup and catch-up projects.
While it doesn’t distort the bottom line, uncategorized income does obscure revenue data, and it must be corrected before the financial statements are suitable to be used for financial planning or sharing with prospective lenders or investors.
QuickBooks Example
Say you have a bookkeeping client who uses QuickBooks to organize their accounting records. They generally collect each customer's payment via Stripe, but they switch to PayPal to accommodate more customers.
Since their QuickBooks hasn’t seen any deposits come from PayPal or that customer before, it doesn’t know which account to match their bill payment to, so it ends up appearing on the profit and loss (P&L) statement as Uncategorized Income.
How To Fix Uncategorized Income in QuickBooks Online
Fixing uncategorized income in QuickBooks Online (QBO) is often a tedious and time-consuming process, especially when you’re cleaning up the records of a company with high deposit volumes.
Since QBO doesn’t offer a convenient way to edit transactions in bulk, you have to track down and correct every uncategorized deposit individually. Even if you know immediately how to reclassify them, the time it takes to do each one can add up quickly.
Here’s how the process works:
1.Generate report: QBO doesn’t provide a convenient way to track down uncategorized transactions, so you typically have to generate a report to identify them for a given period. For example, you can do so through the P&L or general ledger.2. Drill down into the account: After creating a report for the period you’re fixing, click on the Uncategorized Income account total to pull up a list of deposits assigned to the category during the period.3. Drill down into a transaction: From the list of Uncategorized income deposits, click on the first one you want to fix to pull up the details of the transaction.4. Review the transaction details: The transaction’s description, total amount, source, and other details can help you determine where it belongs.5. Reclassify the transaction: Change the transaction’s account from Uncategorized Income to the correct category, such as Product Sales, Consulting Fees, or Interest Income.6. Save and exit: QBO won’t remember that you updated the financial transaction to the appropriate account unless you save it before exiting. 7. Repeat steps 3–6 for each transaction: Exiting the transaction will take you back to the list of deposits assigned to Uncategorized Income for the period, where you can repeat the reclassification process for each one.
If you can’t determine where a bank deposit belongs, fixing its category becomes even more laborious, as you’ll need to consult the client first. Since QBO’s platform doesn’t facilitate convenient communication with them, you typically have to go back and forth via email.
Unfortunately, many clients take days to respond to transaction inquiries, if they reply at all. You often need to send multiple reminders to get an answer, and even then, it may not be sufficiently comprehensive, requiring further rounds of emails for clarification.
Fixing Uncategorized Expenses
Fixing uncategorized expenses in QBO is a similar process to fixing uncategorized income. In fact, the steps are virtually identical, requiring you to generate a report, drill down into the uncategorized expense account, and update each individual transaction.
However, in practice, uncategorized expenses are more common than uncategorized deposits and more difficult to reclassify, making the correction process even more time-consuming. That’s primarily due to:
Volume of expenses: Businesses often process more payments than deposits, so uncategorized expenses tend to pile up in the books more quickly than uncategorized income, even if the rate of misclassification is the same.
Diversity of expenses: Businesses rarely sort their income into more than a handful of accounts, while expenses frequently cover a much broader range of potential categories.
Complexity of expenses: Deposits typically represent a single source of income, while a business expense transaction is more likely to involve multiple costs bundled together.
Given the nature of uncategorized expenses, it’s beneficial to clear them out frequently. You might be able to let uncategorized deposits accumulate for a few months without consequence, but uncategorized expenses should be fixed monthly, at least.
Fixing Uncategorized Assets
Mechanically, fixing uncategorized assets in QBO is much the same as fixing uncategorized income or expenses.
The only practical difference is that the Uncategorized Asset is a balance sheet account, so you may have to generate a different financial statement to identify them.
However, transactions typically get assigned to the Uncategorized Asset account for a specific reason. Namely, when it picks up a transaction in your bank feed that’s described as a transfer, especially to an account that isn’t connected to your QBO.
For example, say you transfer $2,000 from your checking account to your savings account, but only the checking account syncs to your QuickBooks file. In that case, QBO would likely classify the transaction as an Uncategorized Asset.
Making sure all your client’s accounts are connected to QBO can help prevent this issue, as it enables the software to match the transactions across accounts and more easily identify them as two sides of a cash transfer.
You can also establish rules to help QBO categorize transactions correctly going forward, but it won’t fix the backlog you already have.
QuickBooks rules are also far from foolproof, and uncategorized transactions can still slip through the cracks due to slight variations in the bank or payment processing feed.
The New Way: Fixing Uncategorized Income in Keeper
If you’re tired of the repetitive, manual processes of QBO, Keeper can help you fix uncategorized income deposits in a much more efficient way. It’s loaded with features designed to streamline the file review and cleanup process, including:
Automatic transaction highlights: Keeper flags uncategorized income and other potentially problematic transactions for you automatically, so you don’t have to comb through reports hunting for them.
Batch transaction edits: Instead of forcing you to update every transaction individually, Keeper lets you edit them en masse, significantly reducing the time and effort it takes to assign multiple transactions to an appropriate category.
Local client communication: Keeper lets you attach questions to specific transactions and send automatic reminders to unresponsive clients, so you can stop going back and forth via email and start communicating in the same place where you do your work.
Two-way QuickBooks syncing: Any updates you make to your client’s books in the Keeper app automatically sync to your client’s QBO or Xero file and vice versa, ensuring accurate financial records on both ends.
In addition, Keeper’s Receipts feature uses artificial intelligence to study your historical transactions, greatly enhancing its automatic categorization capabilities and reducing the number of uncategorized transactions that arise in the first place.
Project Management and Team Assignments
In addition to facilitating the fixing of uncategorized transactions, Keeper contains features designed to streamline your entire bookkeeping process, including robust project management tools. Some of its most notable capabilities include:
Reusable workflow templates: Keeper lets you create reusable workflow patterns for recurring bookkeeping tasks. These help ensure all work is done consistently and efficiently.
Task tagging and assignments: You can assign specific tasks and subtasks of a project to certain team members and add tags to help them filter and prioritize their responsibilities.
Local team collaboration tools: The same features that make communicating with clients on Keeper more efficient can help enhance collaboration with your team members, including instant messenger and the ability to attach comments and questions to individual transactions.
Best of all, these features are integrated directly into your Keeper dashboard, so you don’t have to juggle multiple apps or tabs like you would with an external project management solution.
Bank Account and Merchant Processing Reconciliation
Account reconciliation is another fundamental bookkeeping task that Keeper can help make significantly more efficient, whether you need to reconcile bank accounts, credit cards, or merchant processing systems.
Not only does Keeper support the process directly on its platform—with a full sync back to your client’s QBO or Xero file—but it also includes features that help keep your account reconciliations organized and make it easy to review their status.
Some of those features include:
Automatic addition to workflows: When you add a new client to Keeper, the software automatically creates an account reconciliation task for each of its bank account and credit card feeds.
Transaction filters by reconciliation status: When you drill down into an account reconciliation task, you can open a ledger of all the transactions it contains and filter them by their status as uncleared, cleared but not reconciled, or reconciled.
Timestamped account balances: Keeper lets you add timestamped account balances to reconciliation tasks, making it easy to find accounts whose balances have changed since you last reconciled them.
If you have a bookkeeping client with multiple related business entities, Keeper can even help you complete intercompany reconciliations by displaying account balances from other QuickBooks files.
The Importance of Categorizing Income Correctly for Financial Reports
Allowing uncategorized income items to accumulate on a client’s books may not affect their net earnings, but it distorts their revenue data and significantly diminishes the value of their P&L for strategic and financial planning.
After all, revenue growth is a key performance indicator (KPI) for many businesses, and analyzing it is often essential for making informed decisions.
For example, your clients may want to know how each revenue stream performs to help them determine which products or services are most profitable and where to allocate their sales and marketing resources.
Categorizing income correctly is even more important if your client intends to share their financial reports with external stakeholders, such as prospective lenders or investors.
These third parties expect to see clean, accurate, and up-to-date financial statements, and having uncategorized income on the P&L won’t instill much confidence in your client’s financial reporting or management.
Common Mistakes in Classifying Uncategorized Transactions
Classifying uncategorized transactions may seem like a straightforward process, but it’s easy to make mistakes that significantly reduce your efficiency, especially in combination. Here are some common ones to avoid:
Using software inefficiently: Whatever bookkeeping software you use, make sure you learn to fully utilize its capabilities. For example, automation tools like bank feed rules and recurring workflow templates can save you time and effort.
Failing to connect all accounts to software: Connecting all of your client’s accounts to their bookkeeping solution ensures you have a comprehensive picture of their finances and helps the software prevent uncategorized assets.
Not knowing when to ask clients for info: Repeatedly asking your client about an uncategorized transaction when you don’t need to can damage the relationship, but spinning your wheels for too long is a waste of time. It’s essential to develop a sense for balancing these competing needs.
Developing effective bookkeeping systems is the best way to avoid mistakes like these. For example, consider following a consistent onboarding routine, transaction categorization workflow, and client check-in process.
Speed Up Month-End Close With Keeper
Keeper is a comprehensive bookkeeping practice management software designed to streamline the month-end. We built it to provide bookkeepers and accountants with a single platform where they can complete all their work in record time.
Some of Keeper’s most powerful features include:
Two-way syncing with QBO and Xero
Personalized workflow templates to facilitate file reviews
Automatic highlighting of uncategorized banking transactions
A custom-branded client portal with magic sign-in links
Built-in communication tools that facilitate collaboration
Digital receipt capture, storage, and organization software
Integrated project management and task assignment tools
Schedule a demo with one of our experts to test-drive Keeper’s powerful software and learn how you can use it to close your clients’ books in half the time.