Security Deposit Liability

When a customer pays a security deposit, a business needs to record a security deposit liability.

If the deposit is refundable within the a year, then the liability will be shown as a current liability, if not, then it should be shown as a long-term liability in the balance sheet.

Security Deposit Liability Journal Entry Example

For example, suppose a property rental business receives a security deposit of 500 from a tenant. As the amount does not belong to the business and will eventually be refunded to the tenant, it cannot be regarded as income and a security deposit liability account needs to be established.

The accounting records will show the following bookkeeping entry for the security deposit liability:

Security Deposit Liability Journal Entry
Account Debit Credit
Cash 500
Security deposit liability 500
Total 500 500

Security Deposit Bookkeeping Explained

The business has received cash from the tenant.

The cash represents a security deposit which, under normal conditions, is returned to the tenant at the end of the rental agreement. The amount is recorded as a security deposit liability on the balance sheet.

Accounting Equation

The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the total equity of the business This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.

Security Deposit Liability Accounting Equation
Assets = Liabilities + Owners Equity
Cash = Security deposit + None
500 = 500 + 0

In this case one asset (cash) increases representing money received from the tenant, this increase is balanced by the increase in liabilities (security deposit liability account).

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