Bookkeeping Security Deposit

8 Replies

Is a security deposit regarded as income for bookkeeping purposes? I'm using Excel spreadsheets for now to do my bookkeeping. How do I account for the security deposit without inflating the cashflow?

How do I account for the return of a security deposit? What would the account be for this transaction? Is it an expense? If so, what kind?

Thank you!

Security deposits you are holding are not your money. You are holding money for your tenant. They should not even be entered as income. They are not even listed on a balance sheet anywhere. They should go into a special bank account that is set up in your name for the benefit of your tenant. If you were ever to be sued or a creditor came after your assets the security deposits can not be touched. If they don't go into the proper account, they could be taken and you could be sued by your tenant when you don't have their deposit money. You could set up a separate spreadsheet if you want to keep track of your security deposits but it has nothing to do with the income and expenses of the property.

strictly in an accounting sense you'd debit a current asset/ cash account and credit either a short or long term liability account depending on the length of your leases. Set up an account for security deposits payable. 

Derek Carroll, NorthMarq Capital | [email protected] | 315‑558‑8332 | http://www.realestatefinanceguy.com

As far as whether or not you need a separate bank account, you'd have to check with your state.  I have a separate bank account even though one of the states I'm in doesn't require it.   It's just good practice.  Currently we have only 1 property we self manage.  The others are all PM'd and they handle all that and I don't have to worry about it.

It's good accounting to keep every dollar that comes to you in either your P&L or balance sheet so it never gets lost.  It would be offsetting entries on your balance sheet.  For me, I have a cash asset called Deposit Cash in my asset section and then a separate offsetting liability for each property's deposit (so I know exactly how much each property's deposit is in the case you need to return it).  The "Deposit Cash" asset will offset all the property deposit liabilities.

If you ever used it for last month's rent or something like that (please consult a lawyer if you do that), it would then go as income and you'd wipe out that liability on the balance sheet.

Originally posted by @Derek Carroll :

strictly in an accounting sense you'd debit a current asset/ cash account and credit either a short or long term liability account depending on the length of your leases. Set up an account for security deposits payable. 

 Agreed - a security deposit is technically a liability because it's something you will owe in the future.  So no, it's definitely NOT income.

From a bookkeeping standpoint, your transaction is to Debit your checking account and Credit your Security Deposits Payable account.

Later on, when it's time to give it back, you would Debit Security Deposits Payable and Credit the checking account.  If you're holding some or all of it back, you would credit the revenue account (which increases revenue).

Medium cluebussol logo3inLinda Weygant CPA, Clue Business Services, Inc. | [email protected] | Podcast Guest on Show #244

Thanks everyone for your answers!!

Originally posted by @Linda Weygant :
Originally posted by @Derek Carroll:

strictly in an accounting sense you'd debit a current asset/ cash account and credit either a short or long term liability account depending on the length of your leases. Set up an account for security deposits payable. 

 Agreed - a security deposit is technically a liability because it's something you will owe in the future.  So no, it's definitely NOT income.

From a bookkeeping standpoint, your transaction is to Debit your checking account and Credit your Security Deposits Payable account.

Later on, when it's time to give it back, you would Debit Security Deposits Payable and Credit the checking account.  If you're holding some or all of it back, you would credit the revenue account (which increases revenue).

If you keep part of the security deposit, it's because you had expenses to fix the place up.  So you're in essence just crediting the "repairs" account (in the expense section).

Example:

1. Take security deposit of $1,000

Debit Checking $1,000 (asset account)

Credit Security Deposits payable $1,000 (short-term liability account)

2. Tenant moves out, you find $200 worth of repairs you need to make so you have the contractor fix things and pay them $200.

Credit Checking $200

Debit Repairs Expense $200

3. Return balance of security deposit to tenant for $800

Credit Checking $800

Debit Security Deposits Payable $1,000 (as you need to zero out the account)

Credit Repairs Expense $200

Withholding all or part of the security deposit shouldn't be treated as income otherwise you're overstating income and you'll be paying extra taxes on that when you don't need to.  The tenant is just reimbursing you for the expenses.

Dawn Anastasi, Core Properties, LLC | http://www.coreprop.biz | Podcast Guest on Show #29

That's very helpful Dawn, thanks!

Security Deposits should be on your BALANCE SHEET as a liability but not income unless the deposit is not returned for whatever breach in contract.  Then you would just do a JE to move it from the liability to income.  So Rob Beland is very much incorrect when he states, "They are not even listed on a balance sheet anywhere".  I think he meant to say - They are not even listed on a P&L anywhere