--- title: "Security deposit accounting for landlords | Ledgerbrook" source: https://ledgerbrook.com/blog/security-deposit-accounting/ description: "Security deposit accounting for landlords: why a deposit is a liability, and the entries to record, apply and return it." --- [Blogs](/blog/) # Security deposit accounting for landlords October 10, 2026 · [Omkar Moraye](/about/) [](https://www.linkedin.com/sharing/share-offsite/?url=https%3A%2F%2Fledgerbrook.com%2Fblog%2Fsecurity-deposit-accounting%2F%3Futm_source%3Dlinkedin%26utm_medium%3Dsocial%26utm_campaign%3Dshare)[](https://x.com/intent/post?url=https%3A%2F%2Fledgerbrook.com%2Fblog%2Fsecurity-deposit-accounting%2F%3Futm_source%3Dx%26utm_medium%3Dsocial%26utm_campaign%3Dshare&text=Security%20deposit%20accounting%20for%20landlords)[](https://www.facebook.com/sharer/sharer.php?u=https%3A%2F%2Fledgerbrook.com%2Fblog%2Fsecurity-deposit-accounting%2F%3Futm_source%3Dfacebook%26utm_medium%3Dsocial%26utm_campaign%3Dshare)[](mailto:?subject=Security%20deposit%20accounting%20for%20landlords&body=Security%20deposit%20accounting%20for%20landlords%0A%0Ahttps%3A%2F%2Fledgerbrook.com%2Fblog%2Fsecurity-deposit-accounting%2F%3Futm_source%3Demail%26utm_medium%3Dsocial%26utm_campaign%3Dshare) ## How do you account for a security deposit? A security deposit a landlord holds is a liability, not income. Record it to a security deposits liability account when received, debiting cash. It becomes income only when part of it is kept for damage or unpaid rent. On a $2,000 deposit with $450 of damage, $450 becomes income and $1,550 goes back. Security deposit accounting starts the day a lease is signed: on March 1 a tenant hands over a $2,000 security deposit with the first month’s rent. In a lot of landlord files, the bank feed sees one $4,000 deposit and QuickBooks books all of it as rental income. Two years later the tenant moves out, the landlord refunds $1,550, and that refund lands in repairs or miscellaneous expense. Income was overstated in the first year, expenses in the last, and the balance sheet never showed that the money was owed back. This post covers the four entries a landlord needs, the tenant’s side in brief, the QuickBooks Online setup, and how to fix a file where deposits were booked as income. ## Is a security deposit a liability or an asset? It depends on which side of the lease you are on. | Party | What the deposit is | Account type | | --- | --- | --- | | Landlord | Money held for the tenant, owed back later | Liability (usually current) | | Tenant | Money paid to the landlord, expected back | Asset (current or other asset) | For the landlord, the deposit stays the tenant’s money until the lease ends. Some or all of it may be kept against damage or unpaid rent, and only the part that is kept ever becomes income. Many landlords show the liability as current even on a multi-year lease, because a tenant can leave early and the money has to be available. ## The four landlord entries The examples use account names and numbers from our [real estate chart of accounts](/blog/chart-of-accounts-for-real-estate/): `1030 Tenant Security Deposit Escrow`, a separate bank account that holds deposits, and `2120 Tenant Security Deposits Held`, the liability. If your state does not require a separate account and you keep deposits in `1010 Property Operating Checking`, use that account in place of the escrow account. ### 1\. Deposit received On March 1 the tenant pays a $2,000 deposit. | Date | Account | Account type | Debit | Credit | | --- | --- | --- | --- | --- | | Mar 1 | Tenant Security Deposit Escrow | Bank | 2,000.00 | | | Mar 1 | Tenant Security Deposits Held | Liability | | 2,000.00 | The first month’s rent paid at the same time is a separate transaction: deposit it to `1010 Property Operating Checking` and apply it to the tenant’s rent invoice in `1100 Tenant Accounts Receivable (Rent Arrears)`. If the tenant hands over one check for both, deposit it to operating checking and transfer the $2,000 to the escrow account, so each bank line matches one entry. ### 2\. Deposit returned in full The tenant moves out, the unit is in good condition, and the full $2,000 goes back. | Date | Account | Account type | Debit | Credit | | --- | --- | --- | --- | --- | | Feb 28 | Tenant Security Deposits Held | Liability | 2,000.00 | | | Feb 28 | Tenant Security Deposit Escrow | Bank | | 2,000.00 | The profit and loss is not touched in either entry. The deposit came in and went out on the balance sheet. ### 3\. Part of the deposit kept for damage The move-out inspection finds $450 of carpet damage. The landlord keeps $450 and refunds $1,550. | Date | Account | Account type | Debit | Credit | | --- | --- | --- | --- | --- | | Feb 28 | Tenant Security Deposits Held | Liability | 2,000.00 | | | Feb 28 | Tenant Security Deposit Escrow | Bank | | 1,550.00 | | Feb 28 | Late Fees & Tenant Charges | Income | | 450.00 | The $450 is income because the landlord now owns it. IRS Publication 527 says the same for tax: a landlord who keeps part of a deposit because the tenant did not meet the lease terms includes that amount in income for the year it is kept. The carpet repair is a separate expense, booked to `5010 Property Maintenance & Turnover Repairs` when the flooring contractor is paid, so on the property’s profit and loss the two roughly cancel. Then move the $450 out of the escrow account, since it is no longer a deposit: a transfer debiting `1010 Property Operating Checking` and crediting `1030 Tenant Security Deposit Escrow`. ### 4\. Part of the deposit applied to unpaid rent The tenant leaves owing $1,200 of February rent, which was already invoiced and sits in `1100 Tenant Accounts Receivable (Rent Arrears)`. The landlord applies $1,200 of the deposit to it and refunds $800. | Date | Account | Account type | Debit | Credit | | --- | --- | --- | --- | --- | | Feb 28 | Tenant Security Deposits Held | Liability | 2,000.00 | | | Feb 28 | Tenant Accounts Receivable (Rent Arrears) | Accounts receivable | | 1,200.00 | | Feb 28 | Tenant Security Deposit Escrow | Bank | | 800.00 | The rent was already income when it was invoiced, so this entry only clears the receivable. The $800 refund check matches one bank line. Then transfer the $1,200 from `1030 Tenant Security Deposit Escrow` to `1010 Property Operating Checking`, which matches the second. ### When the deposit is really last month’s rent A lease that says the deposit will be used as the final month’s rent turns it into prepaid rent, not a security deposit. IRS Publication 527 treats that kind of payment as advance rent, and Treas. Reg. §1.61-8(b) includes advance rent in gross income in the year it is received, whichever accounting method the landlord uses. In the books, an accrual-basis landlord can hold it in `2130 Prepaid Tenant Rent` until the month it covers; a cash-basis landlord records it to `4010 Residential Rental Income` when received. Ask your tax preparer how it should be reported. ## The tenant’s side Commercial tenants put down deposits on leases too, often larger ones. For the tenant, the deposit is an asset: money it expects to get back. The other year-end item on a commercial lease, the [CAM reconciliation](/blog/cam-reconciliation/), runs through income and receivables instead. | Event | Debit | Credit | | --- | --- | --- | | Deposit paid to landlord | Security Deposits (asset) | Operating Checking | | Deposit refunded in full | Operating Checking | Security Deposits (asset) | | Landlord keeps part for damage | Repairs and Maintenance | Security Deposits (asset) | In QuickBooks Online, create it as **Other Current Assets** if the lease ends within a year, or **Other Assets** with the **Security Deposits** detail type if it runs longer. It is not rent expense, and it should not be on the profit and loss while the lease is running. ## How do I record a security deposit in QuickBooks Online? ### Create the accounts 1. Open the **Chart of accounts** and select **New**. 2. For the liability: **Account type** Other Current Liabilities, **Detail type** Rents in trust - Liability. Name it `2120 Tenant Security Deposits Held`. 3. If deposits sit in a separate bank account: **Account type** Bank, **Detail type** Rents Held in Trust. Name it `1030 Tenant Security Deposit Escrow` and connect the bank feed for that account. Detail type names shift slightly between QuickBooks versions. If you do not see Rents in trust, Other Current Liabilities works the same way. ### Record the deposit when it arrives - **From the bank feed:** find the deposit, choose **Categorize**, and set the category to `Tenant Security Deposits Held`. Put the tenant’s name in the payee field so the deposit can be traced later. - **On an invoice:** if you invoice rent, invoice the deposit on the same invoice as the first month’s rent. Create a service item called `Security Deposit` and set its income account to `Tenant Security Deposits Held`. The invoice line then posts to the liability, not to income. - **Never** use your rental income item for a deposit. That is how deposits end up in income. ### Record the return Use **\+ New > Check** or **Expense**, with the tenant as the payee. Put the refund on a `Tenant Security Deposits Held` line. If part was kept, add a second line with a negative amount to `Late Fees & Tenant Charges`, so the check total equals the refund. A journal entry works too, but the check keeps the refund matched to the bank line. ### Tie it out every month Three numbers should agree at every month-end: 1. The balance in `Tenant Security Deposits Held`. 2. The total of deposits on your rent roll or tenant list. 3. If you hold deposits separately, the reconciled balance of the escrow bank account. If the liability and the escrow account do not match, deposit money was spent, or a deposit was recorded to the wrong place. Find it while it is one month old, not at year-end. ## State rules and property managers States set their own rules on security deposits: whether they must be kept in a separate account, whether that account has to earn interest for the tenant, how many days the landlord has to return the deposit, and what must be itemized when part is kept. Check the statute in the state where the property is, not the state where the landlord lives. A property manager holding deposits for several owners has a further layer, trust accounting, where each owner’s and tenant’s money has to be traceable inside one trust bank account. The entries above still apply, but they are tracked by owner as well as by tenant. Our post on [bookkeeping for real estate](/blog/bookkeeping-for-real-estate/) covers how the deposit escrow fits with the rest of a rental portfolio’s controls. ## Fixing deposits that were booked as rental income When we take over a landlord’s file, this is the deposit problem we expect to find first. The signs are rental income that is a round number too high in the month a new lease starts, refunds booked to expense accounts, and no liability account on the balance sheet at all. The fix: 1. Pull every deposit received from the leases, not the bank feed. The lease is the source of truth for each amount. 2. Recategorize each deposit from rental income to `Tenant Security Deposits Held`. 3. Recategorize each refund from expense to the same liability account, and any amount kept to `Late Fees & Tenant Charges`. 4. Check that the liability balance now equals the deposits still held for current tenants. If the books for earlier years have been filed, changing them affects the tax returns already submitted. Correct the current year’s opening balances with a dated journal entry instead, and let your tax preparer decide whether anything needs amending. Unwinding deposits across several properties and years is [cleanup](/quickbooks-cleanup/) work, priced on the number of months involved: $99per month of backlog20% off 6+ months > **When to hand this off:** if deposits were booked as income in a year whose return is already filed, or the liability cannot be tied to the leases, the fix reaches past the current year. A [free file review](/contact/?from=blog%2Fsecurity-deposit-accounting) matches each deposit to its lease before anything is recategorized. Ledgerbrook Behind on your QuickBooks books? Cleanup or catch-up $99 per month of backlog, 20% off 6+ months Turnaround 5 business days for a typical year Monthly close From $99 a client file a month [Get a free file review](/contact/?from=blog%2Fsecurity-deposit-accounting) Free, no card. A written answer within about 48 hours. [See every price](/pricing/) Certified - [![Intuit QuickBooks Certification Level 1](/_astro/level-1.BokmyvzE_Z2cyGo6.webp)](https://www.credly.com/badges/7ceaf1c4-83da-4a1b-b19f-7e15cb5c0ac7/public_url "Intuit QuickBooks Certification Level 1. Verify on Credly.") - [![Intuit QuickBooks Certification Level 2](/_astro/level-2.D-GWLUNI_Z1Sh5RD.webp)](https://www.credly.com/badges/02426568-00bb-46e1-a939-9063497c54d6/public_url "Intuit QuickBooks Certification Level 2. Verify on Credly.") - [![Intuit Bookkeeping Certification](/_astro/bookkeeping.C82JE0Dn_Z1YzPBj.webp)](https://www.credly.com/badges/30b70ae2-e369-4a8b-9fee-d6db3a47b70c/public_url "Intuit Bookkeeping Certification. 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Published October 10, 2026 · Updated October 11, 2026 Share this post[](https://www.linkedin.com/sharing/share-offsite/?url=https%3A%2F%2Fledgerbrook.com%2Fblog%2Fsecurity-deposit-accounting%2F%3Futm_source%3Dlinkedin%26utm_medium%3Dsocial%26utm_campaign%3Dshare)[](https://x.com/intent/post?url=https%3A%2F%2Fledgerbrook.com%2Fblog%2Fsecurity-deposit-accounting%2F%3Futm_source%3Dx%26utm_medium%3Dsocial%26utm_campaign%3Dshare&text=Security%20deposit%20accounting%20for%20landlords)[](https://www.facebook.com/sharer/sharer.php?u=https%3A%2F%2Fledgerbrook.com%2Fblog%2Fsecurity-deposit-accounting%2F%3Futm_source%3Dfacebook%26utm_medium%3Dsocial%26utm_campaign%3Dshare)[](mailto:?subject=Security%20deposit%20accounting%20for%20landlords&body=Security%20deposit%20accounting%20for%20landlords%0A%0Ahttps%3A%2F%2Fledgerbrook.com%2Fblog%2Fsecurity-deposit-accounting%2F%3Futm_source%3Demail%26utm_medium%3Dsocial%26utm_campaign%3Dshare) Continue Reading[All blogs →](/blog/) [ Previous BlogOctober 9, 2026 ### The year-end bookkeeping checklist Year-end bookkeeping checklist for QuickBooks Online: 10 steps in order, the 2027 filing deadlines, and the 1099 changes. 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