How-to · Customers and sales
How to record a security deposit received
A refundable security deposit is money you hold for the tenant or customer, so record it as a liability: debit the bank and credit Security Deposits Held. It only becomes income if you keep some or all of it, for example for damage or unpaid rent.
How-to guides / Security deposit received
The accounting behind it
You expect to give the deposit back, so it is not earned. It sits in a liability account for that tenant until the lease ends.
At move-out, three things can happen: you refund it all, you keep part to cover damage or unpaid rent, or you apply it to the last month's rent. Keeping part moves that part into income (or against the receivable it covers).
Some places require deposits to be held in a separate bank account or to earn interest for the tenant. That is a matter of local law; the bookkeeping is the same with an extra bank account.
| Account | Debit | Credit |
|---|---|---|
| Bank | Deposit | |
| Security Deposits Held (tenant) | Deposit |
| Account | Debit | Credit |
|---|---|---|
| Security Deposits Held (tenant) | Refund | |
| Bank | Refund |
| Account | Debit | Credit |
|---|---|---|
| Security Deposits Held (tenant) | Amount kept | |
| Other income or Repairs | Amount kept |
Worked example: a $1,800 deposit with $250 kept
A tenant pays an $1,800.00 deposit at lease signing. At move-out, repairs to a damaged door cost $250.00, which the lease allows you to deduct. You refund $1,550.00 and keep $250.00.
| Account | Debit | Credit |
|---|---|---|
| Checking | $1,800.00 | |
| Security Deposits Held | $1,800.00 |
| Account | Debit | Credit |
|---|---|---|
| Security Deposits Held | $1,800.00 | |
| Checking | $1,550.00 | |
| Other income (deposit kept) | $250.00 |
Common mistakes
- Recording deposits as rent income, which overstates income and tax in the year you receive them.
- Mixing a last-month's-rent prepayment with a security deposit. Prepaid rent is income when received for US tax purposes; a refundable deposit is not.
- Keeping deductions without the itemized statement many local laws require.
- Losing track of which tenant each deposit belongs to.
In the US and in Canada
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. If you keep part of it because the tenant didn't meet the lease terms, include that part in income in the year you keep it. Advance rent, by contrast, is income when received. State laws set deposit limits, interest and return deadlines.
Canada
Deposit rules are provincial. Some provinces limit deposits or require interest to be paid. The bookkeeping is the same: a liability until it is returned or applied.
In AcboBooks
AcboBooks 0.2.1 has a screen for refundable tenant deposits that keeps a balance per tenant.
- Add the tenant. Add the tenant as a customer in Lists → Customers if they aren't already there.
- Open the screen. Go to Accountant → Security Deposits (Property).
- Receive the deposit. Choose the Tenant, type the Amount and a Memo, and click Receive deposit. AcboBooks debits your bank and credits Security Deposits Held (created for you if missing).
- Refund it. At move-out, choose the tenant, type the amount and click Refund deposit. You can't refund more than the tenant has on deposit.
- Part kept. For an amount you keep, use Activities → Make Journal Entry: debit Security Deposits Held and credit the income account.
The screen posts to the first bank account in your Chart of Accounts and uses today's date, so record each deposit on the day it arrives. The table shows the balance held for each tenant.
Menu names are from AcboBooks 0.2.1. Not using it yet? Try it free for 15 days, with the sample company to practise on.
Questions
Is a security deposit income?
Not while you expect to return it. For US tax, IRS Publication 527 says it becomes income only when you keep it. Treat it as a liability in the books.
What about last month's rent paid upfront?
That is advance rent, not a security deposit. For US tax it is income in the year received. Keep it separate from refundable deposits.
Do I need a separate bank account for deposits?
It depends on your state or province. Where it is required, set up a second bank account and record deposits there.
Related how-to guides
Terms used here
- Accounting software for property management
- Best accounting software for property management
- Customer deposits and retainers
- Accounting software for HOAs
Sources
Updated October 25, 2026. General bookkeeping information, not tax, legal or accounting advice. Rules differ by state and province and change over time; check with the IRS, the CRA or your accountant for your own situation.
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