Recieving and returning security deposits for residential tenancies.

Hi there,

Congrats on your first post in the Community. I want to make sure you get the best answer on how to account for this the right way. 

I recommend contacting an accounting professional. If you're not in contact with one, I encourage you to search for one on our website using this link here. Doing this will help prevent any future discrepancies. Let me know if you have other questions. I'm here to assist. :)

Hello @Jackolla ,

You are correct that you should not make an invoice for a security deposit, as the security deposits you collect are a liability to your company.

Here is how I handled that when I did accounting for a property management company.  First of all, rather than create customers with the client's (renter's) name, I created customers by property address instead.  If it is an apartment building with multiple suites, I set up one address for the main street address, and sub customer's for the Suite #'s.  The current tenant's name can be input just above the address in the Billing address field, in the event you actually have to present an invoice to the tenant.  When the tenant changes, just change the tenant name above the Billing/Shipping Address.

In customer list, each property would look something like this:

Make sure you have a liability account called something like Security Deposits payable.  Set up a bank account type 'rents held in trust' as a sub-account under your main operating account, or as a completely separate bank account, if you have one for this purpose.  The amounts in this account would indicate your liablility and should always match the liability account amount.

Set up a Product/Service, either non-inventory or service type.  Name it 'Security Deposit'.  Enter a description.  For the 'Income Account' enter your liability account, Security Deposits Payable.

When you receive a security deposit, use a Sales Receipt, which you can then give a printed copy to your tenant, when completed.  Enter the Customer (Suite # & Address).  Tab down to Payment Method, and enter Ref # and Deposit to the trust bank account you created previously (or deposit to Undeposited Funds first, and then use the Deposit feature to deposit to your trust bank account).  Tab down to Product/Service and enter the Security Deposit you created earlier.

This transaction will DR your asset account (Trust bank acct) and CR your liability account in one step.

This handles the security deposit and you can pull whatever types of custom reports you want to capture this information.

Set up recurring A/R transactions for each of your properties so that the monthly rental amounts owing to you automatically post against each property (customer) on the 1st of the month.  Manually enter any other invoices for odd amounts or partial months.  When you receive those rents, you receive against each property(customer).  At a glance, in your customer list, you can easily see which properties are paid, and which are getting behind, by the balance in the customer (property) account.

When you refund your security deposit, or portions of it, you will make a payment from your trust account and use the liablity account as the category.  If you are refunding the entire amount, then you would only need line 1 (see below).  If you are deducting amounts from the deposit due to damages or unpaid rents, then add additional lines using appropriate G/L accounts.  In the case of my example below, $500.00 + taxes are being deducted for damaged carpet.  The tenant will only receive $445.00 of their initial $1,000.00 security deposit.

In this situation, due to the damages, you are only reducing your trust account by $445.00, so you now have $555.00 sitting in the trust account that should be going towards the payment of the damages.  I would not call this amount a sale, necessarily, but rather a reimbursement of repairs and services which you have already or will expense and pay for the damages.  (Now I'm not convinced taxes should be added to that amount if it is just a reimbursement of expenses.  If you are in a non-participating province, you would only include the expense amount + PST as you will have already received an ITC for any GST paid for the repairs so ignore the GST I show below).  At this point, then, I would transfer the remaining $555.00 from the trust account into your main operating account.  Now this client's $1,000 deposit is fully removed from the trust account, as well as from the liability account.

Having said all of this, you could also set up your customers with their names, and create classes for each property, as many levels deep as you need.  So customer name would be Jane Doe, and class would be 25 Elm Street (top level class) and #2 (sub-class).  You would just have to remember to classify all income and expenses to each property as necessary.  This part can be done however you like, whatever works best for you.  The only reason I use the properties as the customer instead, is that every time a tenant changes I don't have to set up new recurring charges (rents) for a new client as it always remains static, as well as I don't have to remember to classify every line of every transaction to the correct address.

Hope this helps somewhat.