Journal Entries for Security Deposits

Quick Answer: A security deposit is recorded as an asset (for the payer) or a liability (for the recipient) when paid or received. The deposit remains on the balance sheet until it is either refunded or applied to damages, at which point the asset or liability is removed and any applicable expense or revenue is recognized.

What Is a Security Deposit in Accounting?

A security deposit is a sum of money paid by a tenant to a landlord (or by a customer to a vendor) as collateral against potential damage, unpaid rent, or other contractual defaults. From an accounting perspective, security deposits differ from prepaid expenses because the payer expects to recover the funds rather than consume them. The deposit represents a future economic benefit — the right to a refund — and therefore qualifies as an asset on the payer's books. For the recipient, it is an obligation to return the deposit and is recorded as a liability.

Recording a Security Deposit Paid

When a business pays a security deposit — for example, when signing a commercial lease — the payment creates an asset on the balance sheet. The most common account used is "Security Deposits Receivable" or "Other Current Assets," depending on whether the deposit is expected to be recovered within one year.

If the lease term exceeds one year and the deposit will not be returned in the current period, classify the deposit as a non-current asset. Short-term leases where the deposit is refundable within 12 months may be classified as a current asset.

Recording a Security Deposit Received

When a business receives a security deposit from a tenant or customer, the funds are not earned revenue. Instead, the recipient records a liability because the deposit must be returned (or applied) at the end of the agreement. The standard account is "Security Deposits Payable" or "Customer Deposits."

Under ASC 842 and IFRS 16, landlords must evaluate whether security deposits meet the definition of lease incentives or other arrangements. In most straightforward cases, the deposit remains a liability until lease termination.

Refunding a Security Deposit

When the lease ends and the landlord returns the full deposit, both parties reverse their original entries.

Payer — Deposit Refunded in Full

Recipient — Deposit Refunded in Full

Partial Retention of a Security Deposit

If the landlord retains part of the deposit to cover damages or unpaid rent, the retained portion becomes revenue for the recipient and an expense for the payer. This situation commonly arises at the end of a lease when the property requires repairs beyond normal wear and tear.

Example: Landlord Retains $1,200 for Damages

Payer's entries:

Recipient's entries:

The retained amount may also be recorded as a reduction of rent expense (for the tenant) or rental income (for the landlord), depending on the nature of the deduction. If the retention covers unpaid rent, classify it accordingly rather than as a repair expense.

Security Deposits and Interest

Many jurisdictions require landlords to hold security deposits in interest-bearing accounts and to credit the earned interest to the tenant. If interest is earned on a deposit, the recipient records it as an additional liability, and the payer records it as interest income.

Classification: Current vs. Non-Current

The classification of security deposits on the balance sheet depends on when the deposit is expected to be recovered or returned. Review the lease agreement to determine the expected recovery date:

Situation	Payer Classification	Recipient Classification
Deposit refundable within 12 months	Current Asset	Current Liability
Deposit refundable after 12 months	Non-Current Asset	Non-Current Liability
Deposit applied to final rent payment	Reclassify to Prepaid Rent	Reclassify to Deferred Revenue

For leases with terms exceeding one year, most security deposits are classified as non-current. Be sure to reclassify to current when the refund date approaches within the next reporting period. This is similar to the reclassification approach used for accrued expenses that become due within the current year.

Security Deposits vs. Last Month's Rent

Some lease agreements require both a security deposit and a payment for the last month's rent. These are fundamentally different in accounting treatment. A security deposit is a refundable asset or liability, while last month's rent is prepaid rent — a prepaid expense that is amortized when the final month's rent is due. Recording them in the same account creates confusion at lease end and may result in incorrect financial statements.

Key Takeaways

• Security deposits paid are assets; security deposits received are liabilities — never record them as expenses or revenue upfront.
• Classify deposits as current or non-current based on the expected refund date.
• When a deposit is partially retained, the retained portion becomes expense (payer) or revenue (recipient) while the refund reverses the original entry.
• Interest on deposits increases the liability for recipients and the asset for payers.
• Distinguish security deposits from prepaid rent — they have different accounting treatments and should be tracked in separate accounts, similar to how utility deposits are handled separately from utility expenses.