Handle Deposits

How to Handle a Customer's Security Deposit

A refundable security deposit received from a customer should not be recorded as income.

This is because the money may need to be returned to the customer at the end of the leasing period.

Create a Liability Account

In the Chart of Accounts, create an account such as:

Customer Security Deposits

The account should be classified as a Liability Account.

Receiving the Security Deposit

When the customer pays the security deposit, record the amount against the Customer Security Deposits liability account.

The accounting entry will generally be:

Debit: Bank

Credit: Customer Security Deposits

The deposit is therefore shown as an amount owed back to the customer and is not included as sales income.

Returning the Security Deposit

When the leasing agreement ends and the deposit is refunded:

Debit: Customer Security Deposits

Credit: Bank

This clears the security deposit liability.

If Part of the Deposit Is Forfeited or Used

If part of the security deposit is used to settle unpaid rental, damage charges or other agreed charges, the relevant amount should first be applied to the appropriate invoice or income account.

Any remaining refundable balance should be returned to the customer.

Summary

Refundable security deposit → Liability

Not Rental Income

Not Sales Income

Not Cost of Goods Sold

Refunded at end of lease, subject to the leasing agreement