Security Deposit Journal Entry
Security deposit is the amount that the company paid to landlord or home seller to show the commitment to rent or purchase the property. The landlord demand a security deposit to ensure that tenant informed in advance before leaving. The landlord will have enough time to find a new tenant. Moreover, it is also the cash to settle with property damage caused by tenants during leasing. They will keep the deposit as compensation to repair the property at the end of rental contract.
Security deposits can be refundable or non-refundable depending on the term and conditions of the contract. For refundable security deposit, the landlord will provide cashback to the tenant at the end of the rental contract. The full amount will be refunded if tenant follows terms and conditions and the property does not have any significant damage.
For a non-refundable deposit, the tenant will not receive the money back but it will be used to settle the last period’s rental fees. It prevents the tenant from ending the contract without noticing the landlord. The property owner will keep the deposit if such a case happens.
The deposit may be reclassed to rental expense at the end of the contract. It may be equal to one or a few months of rental fees, it depends on the term of the contract. If both parties agree to renew rental contract, the security deposit will remain the same, tenant needs to pay rental fees as normal. Security deposit will remain with the landlord.
Security Deposit Journal Entry (Non-refundable)
The company needs to make a journal entry by debiting security deposits as current assets and credit cash paid to the landlord.
| Account | Debit | Credit |
|---|---|---|
| Security Deposit | 000 | |
| Cash | 000 |
Security deposit will be presented as the current asset on the company balance sheet. It will be reclassed to rental expense at the end of the contract term. It may cover more than one month’s rental fee depending on the contract.
In the last month (or Last few months) of rental contract, company needs to make journal entry by debiting rental expenses and credit security deposits. The security deposit will be removed from the balance sheet, and we recognize rental expenses without paying additional cash.
| Account | Debit | Credit |
|---|---|---|
| Rental Expense | 000 | |
| Security Deposit | 000 |
Security Deposit Journal Entry Example
On 01 Jan 202X, Company ABC rent an office building from Mr. A who require to make a deposit of $ 3,000. The monthly rental fee is $ 1,000, so the deposit is equal to 3 months’ rental fees. The deposit is not refundable, it will be used to settle the last 3 months if both parties do not wish to renew the contract.
The contract term is only one year, before contract ending, ABC decides to move the office to a new location. So they will not renew the rental contract, they simply let it end.
- On 01 January 202X:
Company ABC should make the following journal entry by debiting a security deposit of $ 3,000 and credit cash $ 3,000. Security deposit of $ 3,000 will be present on the balance sheet as current assets.
| Account | Debit | Credit |
|---|---|---|
| Security Deposit | 3,000 | |
| Cash | 3,000 |
- On 31 Oct 202X
The company does not continue the contract, so the deposit will be used to settle the last 3 months’ rental fees. They will stop making payments to Mr. A, but use the deposit to settle the rental. They need to make journal entry by debiting rental expenses and credit security deposits. The rental expense will record into the income statement and the security deposit will decrease by $ 1,000.
| Account | Debit | Credit |
|---|---|---|
| Rental Expense | 1,000 | |
| Security Deposit | 1,000 |
- On 30 Nov 202X
Similar to previous month, we need to reclass the security deposit to rental expense as we still use the rental service but we do not make any payment. The company needs to debit rental expense $ 1,000 and credit security deposit $ 1,000.
| Account | Debit | Credit |
|---|---|---|
| Rental Expense | 1,000 | |
| Security Deposit | 1,000 |
- On 31 Dec 202X
At the end of the contract, the company needs to debit rental expense of $ 1,000 and credit the security deposit of $ 1,000. Security deposit will be zero, as we have used it to settle rental expenses for the last three months.
| Account | Debit | Credit |
|---|---|---|
| Rental Expense | 1,000 | |
| Security Deposit | 1,000 |
Security deposit journal entry for Lessor (Non-refundable)
After we check the accounting treatment of security deposit in the lessee book, now let take a look at the lessor’s book. The lessor will receive the cash when the lessee deposits at the beginning of the lease agreement. Different from the lessee, lessor needs to record a liability in balance when receiving cash. This liability will be recognized as revenue at the end of the lease term based on the agreement.
In this section, we only talk about the non-refundable deposit when the deposit will be used to settle the rental expense at the end of the lease term. The number of periods to be settled will depend on the deposit amount and monthly rental fee. It is usually equal to 3 months.
Security Deposit Example – Lessor
Company XYZ rent an apartment to Mr. B for a period of 2 years. The contract starts on 01 Jan 202X with a monthly rental fee of $ 500 and a security deposit of $ 2,000.
The security deposit will be used to settle any damage or the last 4 months’ rental fee. Please prepare the journal entry related to the security deposit. Assume there is no damage to lease property at the end of the lease term.
Solution
On 01 Jan 202X, the company receive a cash deposit from Mr. B. We cannot record revenue as it is the security deposit. It should be recorded as a liability in the balance sheet. It will be reclassed to rental revenue at the end of the contract term.
- The company make journal entry by debiting cash $ 2,000 and credit liability $ 2,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 2,000 | |
| Security Deposit | 2,000 |
Security deposit will be present on balance sheet under the liability section until the end of the rental contract.
At the end of the rental contract, Company need to inspect the property if there is any damage that requires the lessee to repair or compensate. The lessor will deduct this to repair any damage if necessary. Based on this example, the property does not have any significant damage, so it will be used to settle the rental in the last 4 months.
On 30 Sep 202X+1, the company needs to reverse the security deposit to rental income as the lessee stopped making payment. The company makes journal entries by debiting a security deposit of $ 500 and credit rental income $ 500.
| Account | Debit | Credit |
|---|---|---|
| Security Deposit | 500 | |
| Rental income | 500 |
The security deposit will reduce from the balance sheet and move to revenue on the income statement. The lessor only reverses the security deposit when the contract finishes.
The lessor needs to reverse from security deposit to revenue for the last 4 months of the contract. The total amount will be $2,000 so it means that the security deposit will be zero on 31 December 202X+1. Please refer to the table below.
| Month | Balance |
| September 202X+1 | 500 |
| October 202X+1 | 500 |
| November 202X+1 | 500 |
| December 202X+1 | 500 |
| Total | 2,000 |
Security deposit will be recorded as current assets on lessee financial statement and reversed to expense in the last months of the contract term. During this period, the lessee will not require to pay a rental fee as they utilize the deposit.
However, the deposit is recorded as a current liability on the lessor financial statement and reversed to rental income. The lessor will not receive the cash during the time of reversing the deposit to revenue.
Both parties will reverse the security deposit if they do not renew the rental contract. If both parties agree to renew the contract, they will keep the security on balance sheet as current assets and liability.