Security Deposit – Introduction

A Security Deposit is an amount collected from a tenant at the beginning of a lease. In the system, a security deposit can be either Refundable or Non-Refundable, depending on the lease agreement. The accounting treatment and usage of the deposit vary based on its type.

Types of Security Deposit:

1. Refundable Security Deposit

A Refundable Security Deposit is an amount that must be returned to the tenant at the end of the lease. Since this amount does not belong to the landlord, it is treated as a liability. A Refundable Security Deposit is treated as a liability, since it must be returned to the tenant at the end of the lease.

At the time of invoicing

When an invoice is created for a refundable deposit, the system records:

  • Accounts Receivable — Debit
  • Refundable Security Deposit Liability — Credit

This shows that the tenant owes the deposit, and the business holds it as a liability.

When tenant makes payment

When payment is received:

  • Security Deposit Trust Account (Bank) — Debit
  • Accounts Receivable — Credit

The amount is stored in a designated trust account until refunded.

2. Non-Refundable Security Deposit

A Non-Refundable Security Deposit is retained by the landlord and treated as income. It is recognized as revenue at the time of invoicing.

At the time of invoicing

When invoiced:

  • Accounts Receivable — Debit
  • Revenue Account — Credit

This records the amount of earned income.

When tenant makes payment

  • Bank Account — Debit
  • Accounts Receivable — Credit