Account for a tenant security deposit as a liability from the day it arrives, never as income: debit the bank account that received it and credit a liability account such as Security deposits held. The balance stays there for the whole tenancy. At move-out it leaves by one of two entries: a refund, which debits the liability and credits cash, or an application, which debits the liability and credits income for the part you keep.
Here is the afternoon this guide is for. It is the 31st, 4:10 PM, and the resident in 3B has just handed back two keys and a fob. The walkthrough found one cracked bathroom tile, quoted at $180 to replace. The lease says the deposit was $1,800, taken four years ago, and your market sets how long you have to return it. The question is not what to deduct. It is where that $1,800 has been for four years, and what the books say about it.
This is a spoke of Property Management Accounting: The Complete Guide. This one covers the deposit: the entry when it arrives, the two entries that release it, and the move-out procedure between them.
What a security deposit is on the books
A security deposit is money a resident pays at the start of a tenancy that you hold under conditions and owe back at the end, less any deductions the lease and your market allow. On the books it is a liability: an amount the business owes to someone else. It is not income, because nothing has been earned. The cash is in your account, and so is an obligation of exactly the same size.
That is why the deposit gets its own liability account, usually named Security deposits held (its place in the chart is covered in Chart of Accounts for Property Management: How to Build One), and why that account's balance should equal, to the cent, the total you hold across every current tenancy.
Tax authorities read it the same way. In the United States, IRS Publication 527 says not to include a security deposit in income when you receive it if you plan to return it at the end of the lease, and to include only the amount you keep, in the year you keep it. In Canada, the CRA's rental income guide T4036 lists interest paid to tenants on rental deposits among deductible expenses, a reminder that some markets require a held deposit to earn interest for the resident.
A deposit invites two mirror-image mistakes: booking it as income when it arrives, so the month looks better than it was and the refund years later lands as an expense with no account to come out of; and booking the refund as an expense, which leaves the liability balance overstated for good. Both produce a Security deposits held balance nobody can tie to a list of residents, and both have the same fix: the deposit enters through the liability account and leaves through it.
The security deposit journal entries, from collection to refund
The table below shows the journal entry for each event in a deposit's life, using the account names Scaalr uses; any chart with a deposit liability, a cash account, and the two income accounts works the same way.
| Event | Debit | Credit | What it means |
|---|---|---|---|
| Deposit received | Cash and bank | Security deposits held | The liability begins; nothing is earned |
| Full refund at move-out | Security deposits held | Cash and bank | The liability is settled; no income, no expense |
| Partial refund with a deduction | Security deposits held, the original amount | Cash and bank for the refund; Damage recovery income for the deduction | The liability ends; only the deduction becomes income |
| Rent deposit applied to the last rental period | Security deposits held | Rent income | The deposit pays the final period's rent in place of cash |
| Deposit kept for unpaid rent | Security deposits held | Rent receivable, or Rent income if the rent was never charged | The arrears are settled from the deposit |
| Damage costs more than the deposit | Security deposits held, the full amount | Damage recovery income | The deposit is kept whole; the balance is invoiced to the resident |
Every release debits the liability account, and income appears only on the day you keep something, itemized, with a reason on the entry.
How to close out a security deposit at move-out, step by step
The procedure below covers the accounting side of a move-out, from the lease to the last entry. Timing, what may be deducted, and what you owe the resident in writing are set by your market; check them before step 2.
- Confirm the deposit on the lease. Amount, kind (security, rent, key, or pet), currency, and the date it was taken. That figure, not the ledger balance, is what this resident is owed.
- Inspect and itemize. Document what the walkthrough found, price each item, and separate wear from damage under the lease and your market's rules; interest owed on the deposit, where required, is calculated here.
- Decide the split. Refund, deduction, or both. If the deductions exceed the deposit, keep the whole deposit and bill the difference as an invoice.
- Post the release entry. Full refund, partial refund with deductions, or the rent deposit applied to the final period, dated the day you settle it.
- Pay the refund from the account that holds the deposit. If deposits sit in a separate bank account, the refund comes out of that account, so the bank and the ledger keep telling the same story.
- Send the itemized statement. Every deduction with its amount and reason, and the refund figure, inside your market's deadline; the statement and the entry carry the same numbers.
- Check the liability balance. Security deposits held should have dropped by exactly the original deposit, and the refund clears against its entry in the monthly reconciliation when the bank statement arrives.
Step 1 is the one that gets skipped. The resident is owed a specific amount on a specific lease, and a refund worked from the ledger balance instead of the lease is how an $1,800 deposit comes back as $1,750.
What varies by market, and what does not
What varies by market: how much you may take, which kinds of deposit are allowed, whether the money must sit in a separate account, whether it earns interest for the resident, what you may deduct, and how long you have to return it. None of that is accounting, and this guide decides none of it. The rules where the property sits do.
What does not vary: the deposit is a liability from the day it arrives, a refund is never an expense, and only the part you keep becomes income, on the day you keep it, with an itemized reason. A separate bank account, where your market requires one or you choose one, changes only which cash account the entry uses.
How Scaalr handles security deposits
In Scaalr the deposit is recorded twice, on purpose: on the lease as a term, and in the ledger as a liability. The lease carries the amount, the currency, and the kind of deposit (a rent deposit applied to the last rental period, a security deposit, a key deposit, or a pet deposit), and the lease form warns when the chosen kind is one the property's market does not permit. The warning is advisory, not a ruling on legality; you confirm the rules where the property sits. When a lease is renewed, the deposit carries forward to the new lease, because a deposit follows the tenancy rather than the paper.
The ledger side runs on the journal entry templates. Three of the twenty prebuilt templates are deposit entries, each producing a balanced entry with the accounts already chosen. "Refund security deposit, full" debits Security deposits held and credits cash for the amount you enter. "Refund security deposit, partial with deductions" takes the original deposit, the refund, and the deduction: it releases the full liability, credits cash for the refund, and credits Damage recovery income for the deduction, and it carries its own caution that damage deductions are not permitted for residential tenancies in some markets. "Apply rent deposit to last month's rent" moves the held amount from the liability to rent income. The collection entry is a two-line manual entry or two rows in a CSV import, and if the chart does not yet carry Security deposits held or Damage recovery income, the templates create those accounts the first time they run.
A template fills a draft; you read the lines and post. A posted entry can be unposted only with a recorded reason, every posting sits on the audit trail, and an entry dated into a closed month is refused until the month is reopened, as set out in Month-End Close Checklist for Property Managers. A shortfall beyond the deposit is billed through an invoice with a card-payment link, which is Growth and up; the ledger, the leases, and the templates are on every plan, including Starter.
Back to 3B. The lease says $1,800, taken four years ago; the walkthrough says $180. One template takes the three numbers, releases the $1,800, sends $1,620 back, and records $180 of damage recovery income with the reason on the line. The statement you hand the resident carries the same three numbers. Four years of holding someone else's money end in one balanced entry.
Key questions
Is a security deposit income or a liability?
A liability, from the day it arrives until the day it is refunded or applied. A security deposit does not count as rental income when received, because it is owed back; it becomes income only for the part you keep, in the period you keep it. In the United States, IRS Publication 527 states the same rule for tax: leave a refundable deposit out of income when you receive it, and include only what you keep, in the year you keep it.
Is a security deposit refund an expense?
No. A refund settles a liability; it is not a cost of operating the building, and it never touches the income statement. The entry debits Security deposits held and credits cash, so the balance sheet shrinks on both sides by the same amount.
Do I need a separate bank account for security deposits?
Often, and it is good practice regardless. Many markets require deposits to be held apart from operating funds, some in a trust account with rules of its own; the requirement is set where the property sits, so check it rather than assume. In the books, a separate account changes only which cash account the entries use: flag it as a cash account and reconcile it monthly like any other.
Is a last month's rent deposit accounted for the same way?
In the books, yes. A rent deposit is held as a liability until the rental period it pays for arrives, then moves from Security deposits held to rent income. Tax treatment can differ: in the United States, IRS Publication 527 treats an amount that is to be used as the final rent payment as advance rent, included in income when received, so ask your accountant how your market taxes it.
What if the damage costs more than the deposit?
Keep the whole deposit and bill the difference. The release entry debits Security deposits held for the full deposit and credits Damage recovery income for the same amount; the shortfall is a separate invoice to the resident, which posts its own receivable and income when it is created. The itemized statement shows both: the deposit applied in full, and the balance still owed. Raising that invoice is covered in Property Management Invoicing: Residents, Owners, Contractors.
How do I know the deposit liability balance is right?
Compare it to the leases. The total of every current lease's recorded deposit should equal the balance of Security deposits held: the ledger holds the total, the leases hold who is owed what. Run the comparison after every move-out, and work any difference by resident: a deposit booked to the wrong account, a refund never posted, or a lease whose deposit was never recorded. In Scaalr the deposit is a typed term on each lease, so the per-resident figures already exist.
Which Scaalr plan includes the deposit entry templates?
All of them, including Starter. The journal entry templates, manual entries, the ledger, and the deposit field on the lease are on every plan; Starter is free for the first 5 units, then $0.99 a unit a month. Invoicing, which is how a shortfall beyond the deposit is billed and collected by card, is Growth and up, at $99 a month for the first 50 units, then $1.49 per additional unit.