We faced problems while connecting to the server or receiving data from the server. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.

Customer advance A/C is credited while recording an advance received entry. The instructions provided by Pete_Mc and my colleague ShiellaGraceA above should be able to help you apply the tenant’s security deposit. I’ve come to help with your concern about applying tenant’s security deposit in QuickBooks Online (QBO).

In most cases, security deposits are common when renting or leasing properties. When the company receives the security deposit, they have to record cash received and liability on the balance sheet. As per accrual based accounting the revenue is earned at this step i.e. when the final product is ready for delivery. An invoice is sent to the customer, consequently, the customer advance shown as a liability on the balance sheet is removed. I need to keep track of the invoice I sent the tenant and would like to link the security deposit (in a liability account) to the payment of that invoice. Depending on a state’s laws, landlords who don’t return security deposits on time may be subject to penalties or may be sued by the tenant.

All rental accounting software works a little bit differently for security deposit accounting. In addition to staying organized and keeping accurate records, it’s important that your financial reporting follows state regulations related to security deposit accounting. This is why creating an escrow account designated explicitly for security deposits is important. You should never mix these funds with other business accounts, as this will confuse your bookkeeping and put your financial records at risk of inaccuracies or discrepancies.

The security deposit should also be returned in accordance with the terms of the lease agreement. When the lease agreement ends, the tenant may receive a full refund from the landlord. If a full refund does not occur, the tenant records any withheld amount as an expense. Some lease contracts provide the lessee with the right to get the asset after they end.

  • The other financial statements use the accrual concept, which can be confusing sometimes.
  • Company ABC rent the building to a customer $ 50,000 per month to the customer.
  • He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
  • However, landlords take care to treat every prospective tenant equally when setting the security deposit amount, to avoid violating state and federal fair housing laws.

The billable expense feature will help you keep track of your customer’s expenses and invoices. If you have any questions related to bookkeeping transactions for rental properties, please feel free to drop me a note and I’ll respond with an answer. I’ll be around in case you have follow-up questions about your security deposit transaction, so don’t hesitate to swing by. Advance received from a customer is not equivalent to accrued income. You may also want to view all your sales and vendor transactions in QuickBooks. This will give you a great view of the status of your sales and expense transactions.

Journal Entry for Returning a Tenant’s Security Deposit

Lessees usually record this amount when they pay it to the lessor. Once they return the underlying asset, they will receive their payment back. Therefore, they will substitute their receivables for cash in exchange. In this section, we only talk about the non-refundable deposit when the deposit will be used to settle the rental expense at the end of the lease term.

Usually, security deposits go under the operating or investing activities. As mentioned above, security deposits may have various treatments on the cash flow statement. In most cases, the deposits paid or received to business parties falls under operating activities. However, the treatment under that section also differs based on other factors.

  • At that time, the security deposit is an asset for the tenant that they can keep on the balance sheet.
  • Security deposits are most common in the housing market, where tenants must pay the landlord before renting a house.
  • Usually, security deposits go under the operating or investing activities.
  • It will be used to settle the rental fee at the end of the rental contract.
  • Once they return the underlying asset, they will receive their payment back.
  • Some states, such as Arizona and Nebraska, require a landlord to return the tenant’s security deposit within 14 days of the termination date of the lease.

At this point, the tenant reclassifies the asset type in the balance sheet. However, the accounting treatment may be more complex if the full refund does not occur. In that case, the tenant records any amount withheld by the landlord as an expense. In most cases, tenants pay a security deposit before moving into a property.


The company needs to make a journal entry by debiting security deposits as current assets and credit cash paid to the landlord. Security deposits under cash flows from operating activities may also be a part of prepayments. In that case, companies will include them as an increase or decrease. In that case, security deposits on the cash flow statement will look as follows. Overall, security deposits go on the cash flow statement, but the treatment may differ based on some factors.

Security Deposit Journal Entry Example

Security deposits also appear under cash flow from investing activities. In this case, these deposits will relate to a company’s investments. These can be inflows or outflows based on being payments or receipts.

Refund a security deposit in QuickBooks Online

Make sure to select A/R as the account and the landlord’s name under the name column of the JE. The credit amount posting account is A/R, while the debit amount is a bank. This way the journal entry will be linked to the customer’s invoice. However, landlords take care to treat every prospective tenant equally when setting the security deposit amount, to avoid violating state and federal fair housing laws. Security deposits are typically reported on the balance sheet as a current asset.


If both parties agree to renew the contract, they will keep the security on balance sheet as current assets and liability. After we check the accounting treatment of security deposit in the lessee book, now let take a look at the lessor’s book. The lessor will receive the cash when the lessee deposits at the beginning of the lease agreement. Different from the lessee, lessor needs to record a liability in balance when receiving cash. This liability will be recognized as revenue at the end of the lease term based on the agreement.

What is a Cash Flow Statement? What Are The Three Sections?

Security deposits can be refundable or non-refundable depending on the term and conditions of the contract. For refundable security deposit, the landlord will provide cashback to the tenant at the end of the rental contract. The full amount will be refunded if tenant follows terms and conditions and the property does not have any significant damage. As a result, journal entry for advance received from a customer is entered in the books.

A security deposit is the amount of cash that tenants pay to the landlord as security during the rental agreement. It will be used to settle the rental fee at the end of the rental contract. It helps the landlord to ensure the property remains in good condition at the end of the contract. The company enters into a lease agreement that requires a monthly payment of $10,000. For the initial transaction, the lease contract also requires ABC Co. to pay a security deposit of $50,000.

Primarily, security deposits serve as an intangible security measure. In other cases, it acts as tangible security in the event of damages or lost property. For the supplier, these deposits can be crucial in ensuring the safety of their supplies or assets. Most suppliers refm excel for real estate certification level one use it to guarantee that they will get repaid for any damages. For the customer, security deposits help guarantee the transaction will go ahead as expected. When leasing a property, companies must meet several conditions specified in the lease agreement by the landlord.

I’ll share some information about the tenant’s security deposit. As mentioned by our Allstar @Pete_Mc, you can create an expense transaction and use the security deposit account to keep track of the deposit balance. If they damaged the property and it is not “normal use” where you need to actually pay for it, then I would Invoice them for the repairs. You can either require payment in full or you could increase their rent by X amount to recoup the expense over time. Pending what your laws are there regarding changing the rent, you may need to have a them sign an agreement acknowledging the increase is due to their damages.