Is a security deposit for a rental agreement recorded in a liability account?
The person paying the security deposit would credit the asset account Cash and would debit the asset account Security Deposits. The person receiving the security deposit would debit the asset account Cash and would credit the liability account Security Deposits Returnable.
Let’s use an example. Monica pays the landlord $500 as a security deposit as required by the lease for the apartment she is renting. If she causes no damage, she has a right to the $500 at the end of the lease. She gave up an asset (Cash of $500) but has another asset: the right to $500 at the end of the lease. The landlord receives the $500, but has an obligation to return the security deposit at the end of the lease. The landlord received an asset (Cash of $500) but has a liability to return the $500 at the end of the lease (unless there are damages).
As the example showed, a security deposit is an asset for one party and the same security deposit is a liability for the other party.
Learn more about the Balance Sheet.
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Wouldn’t you DEBIT cash as the person paying the security deposit?
Cash is a DEBIT account. Therefore DEBITS add to its balance. CREDITS reduce its balance. Don’t get to hung up on the word DEBIT and CREDIT they mean different things in accounting than our standard consumer terminology.
So what type of asset is a security deposit? I’m guessing either “current asset” or “other asset” because its not a fixed asset, but which one? My understanding is that current assets can be turned liquid quickly. I’m not sure if thats true of a security deposit because of term of the lease or agreement.
Please help.
Security Deposit is considered as a non-current asset.
If the security deposits is refundable in 1 year or less it is classified as current asset. If its more than 1 year. It is non-current asset at PV.
How would you show in the example when:
not all of the security deposit is returned (ie damage to property, unpaid bills)?
Dr Deposit
Cr Bank
Initial Recognition
Dr Repairs (or more appropriate account)
Cr Deposit
Account for repairs taken out of deposit
Dr Bank
Cr Deposit
Refund of remaining deposit
How would you account for a bank guarantee given to lessor instead of actual deposit?