When a customer pays a security deposit, a business needs to record a security deposit liability.
If the deposit is refundable within the a year, then the liability will be shown as a current liability, if not, then it should be shown as a long-term liability in the balance sheet.
Security Deposit Liability Journal Entry Example
For example, suppose a property rental business receives a security deposit of 500 from a tenant. As the amount does not belong to the business and will eventually be refunded to the tenant, it cannot be regarded as income and a security deposit liability account needs to be established.
The accounting records will show the following bookkeeping entry for the security deposit liability:
|Security deposit liability||500|
Security Deposit Bookkeeping Explained
The business has received cash from the tenant.
The cash represents a security deposit which, under normal conditions, is returned to the tenant at the end of the rental agreement. The amount is recorded as a security deposit liability on the balance sheet.
The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the total equity of the business This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.
In this case one asset (cash) increases representing money received from the tenant, this increase is balanced by the increase in liabilities (security deposit liability account).
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.