How Do I Account for Security Deposits?

Start with the deposit's legal purpose

A refundable tenant security deposit is generally an amount you may have to return. From a bookkeeping perspective, receiving it usually creates both cash and a liability to the tenant. It is not ordinary rental income merely because it reached your bank account.

State and local law may dictate where the money must be held, whether it earns interest, what deductions are permitted, and how quickly an itemized refund must be delivered. Your ledger should support those legal records rather than replace them.

Keep deposit cash and deposit obligations visible

Many landlords use a separate bank or trust account for deposits when required or operationally useful. The bank balance is an asset. The amount owed back to tenants is a liability. Those balances often match, but they can differ because of bank interest, lawful deductions, transfers, or posting mistakes.

Maintain tenant-level detail even if the general ledger uses one liability account. You should be able to explain the total by tenant, lease, receipt date, deductions, and refund.

Record what happens at move-out

A full refund reduces cash and the deposit liability. A lawful amount applied to unpaid rent reduces the liability and recognizes rental income or settles rent receivable, depending on your accounting method and existing entries.

An amount retained for tenant-caused damage may become income or reimburse an expense, depending on the facts and tax treatment. Do not automatically net repair costs against the deposit in a way that hides both the deduction and the actual vendor expense.

• Reconcile the deposit bank account and liability detail regularly.
• Retain the lease, receipt, move-in condition report, invoices, photographs, and refund statement.
• Review state and local deposit rules before deciding what can be withheld.

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