When a tenant pays a security deposit, a business (landlord) needs to record a security deposit liability. The security deposit is held by the landlord to protect them in case of damage or unpaid rent caused by the tenant. The landlord must account for the deposit during the lease term and return it to the tenant at the end of the agreement.
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 on the balance sheet.
Security Deposit Liability Journal Entry Example
To illustrate, 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:
| Account | Debit | Credit |
|---|---|---|
| Cash | 500 | |
| Security deposit liability | 500 | |
| Total | 500 | 500 |
Security Deposit Bookkeeping Explained
Debit
Firstly the business has received cash from the tenant.
Credit
Secondly the cash represents a security deposit which, under normal conditions, is returned to the tenant at the end of the rental agreement. Consequently the amount is recorded as a security deposit liability on the balance sheet.
Accounting Equation
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. It is important to realize that 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).
Popular Double Entry Bookkeeping Examples
This security deposit liability journal entry is one of many examples used in double entry bookkeeping in business. Discover another at the links below.
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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 and has built financial models for 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 degree from Loughborough University.