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Level 1

Recieving and returning security deposits for residential tenancies.

I would like to know how I should handle both receiving and returning security deposits for a residential tenancy. I was advised to use an invoice to record receiving the payment, but that will include it in income and that's not how it works. I would like to record receiving the asset and creating the liability at the same time. I would then return the cash at a later date, perhaps creating an expense if repairs were required but how would I handle it for the purpose of covering late/missed rent or utilities? Finally, how would I return it to the tenant after they move out? I would need to decrease the liability and the cash held on hand?


Thanks for taking a look.

10 Comments 10
QuickBooks Team

Recieving and returning security deposits for residential tenancies.

Hi there,


Congrats on your first post in the Community. I want to make sure you get the best answer on how to account for this the right way. 


I recommend contacting an accounting professional. If you're not in contact with one, I encourage you to search for one on our website using this link here. Doing this will help prevent any future discrepancies. Let me know if you have other questions. I'm here to assist. :)

Level 8

Recieving and returning security deposits for residential tenancies.

Hello @Jackolla ,


You are correct that you should not make an invoice for a security deposit, as the security deposits you collect are a liability to your company.


Here is how I handled that when I did accounting for a property management company.  First of all, rather than create customers with the client's (renter's) name, I created customers by property address instead.  If it is an apartment building with multiple suites, I set up one address for the main street address, and sub customer's for the Suite #'s.  The current tenant's name can be input just above the address in the Billing address field, in the event you actually have to present an invoice to the tenant.  When the tenant changes, just change the tenant name above the Billing/Shipping Address.

Rental property customer.PNG


In customer list, each property would look something like this:

Rental customer list.PNG


Make sure you have a liability account called something like Security Deposits payable.  Set up a bank account type 'rents held in trust' as a sub-account under your main operating account, or as a completely separate bank account, if you have one for this purpose.  The amounts in this account would indicate your liablility and should always match the liability account amount.


Set up a Product/Service, either non-inventory or service type.  Name it 'Security Deposit'.  Enter a description.  For the 'Income Account' enter your liability account, Security Deposits Payable.


When you receive a security deposit, use a Sales Receipt, which you can then give a printed copy to your tenant, when completed.  Enter the Customer (Suite # & Address).  Tab down to Payment Method, and enter Ref # and Deposit to the trust bank account you created previously (or deposit to Undeposited Funds first, and then use the Deposit feature to deposit to your trust bank account).  Tab down to Product/Service and enter the Security Deposit you created earlier.



Sales Receipt for Security Deposit.PNG


This transaction will DR your asset account (Trust bank acct) and CR your liability account in one step.


This handles the security deposit and you can pull whatever types of custom reports you want to capture this information.


Set up recurring A/R transactions for each of your properties so that the monthly rental amounts owing to you automatically post against each property (customer) on the 1st of the month.  Manually enter any other invoices for odd amounts or partial months.  When you receive those rents, you receive against each property(customer).  At a glance, in your customer list, you can easily see which properties are paid, and which are getting behind, by the balance in the customer (property) account.


When you refund your security deposit, or portions of it, you will make a payment from your trust account and use the liablity account as the category.  If you are refunding the entire amount, then you would only need line 1 (see below).  If you are deducting amounts from the deposit due to damages or unpaid rents, then add additional lines using appropriate G/L accounts.  In the case of my example below, $500.00 + taxes are being deducted for damaged carpet.  The tenant will only receive $445.00 of their initial $1,000.00 security deposit.


Refund deposit.PNG



In this situation, due to the damages, you are only reducing your trust account by $445.00, so you now have $555.00 sitting in the trust account that should be going towards the payment of the damages.  I would not call this amount a sale, necessarily, but rather a reimbursement of repairs and services which you have already or will expense and pay for the damages.  (Now I'm not convinced taxes should be added to that amount if it is just a reimbursement of expenses.  If you are in a non-participating province, you would only include the expense amount + PST as you will have already received an ITC for any GST paid for the repairs so ignore the GST I show below).  At this point, then, I would transfer the remaining $555.00 from the trust account into your main operating account.  Now this client's $1,000 deposit is fully removed from the trust account, as well as from the liability account.


Having said all of this, you could also set up your customers with their names, and create classes for each property, as many levels deep as you need.  So customer name would be Jane Doe, and class would be 25 Elm Street (top level class) and #2 (sub-class).  You would just have to remember to classify all income and expenses to each property as necessary.  This part can be done however you like, whatever works best for you.  The only reason I use the properties as the customer instead, is that every time a tenant changes I don't have to set up new recurring charges (rents) for a new client as it always remains static, as well as I don't have to remember to classify every line of every transaction to the correct address.


Hope this helps somewhat.






Level 1

Recieving and returning security deposits for residential tenancies.


please disregard my query.


Level 8

Recieving and returning security deposits for residential tenancies.

Hello @lygherl ,


Click on 'NEW' in top left corner.  Go to 'OTHER'  Click on 'Transfer'.  Transfer funds from Security Deposit account to regular Bank account.  This is the easiest way to do it so that you don't have to make a journal entry.  But if you are comfortable working with journal entries then by all means, you can do it that way too.

Level 1

Recieving and returning security deposits for residential tenancies.

This was incredibly helpful, thank you!

Any chance that you have already posted the process for setting up the reoccurring A/R for rents due? If so, could you please let me where I could find it?


QuickBooks Team

Recieving and returning security deposits for residential tenancies.

Hi Tsommer2003,


I want to welcome you to the QuickBooks Community. You'll find a lot of great articles and many knowledgeable users to connect with. Creating recurring transactions can be done with ease in your QuickBooks Online account. I can provide you with all the steps that you need.


To record revenue in your QuickBooks Online, you create an invoice or a sales receipt. You'll find all the steps for making your transactions recurring in this article: Create recurring transactions in QuickBooks Online. The article explains what it means to schedule a recurring transaction and how to set reminders. You'll also find the instructions for editing the recurring transaction afterwards if you need to.


If you have any questions, feel free to reach back out. Have a wonderful evening! 

Level 8

Recieving and returning security deposits for residential tenancies.

Hello @Tsommer2003 ,


I have not posted a procedure for that.  However, if you create a customer for each address as described in the post above, and then create an invoice for the first month's rent for each unit, after saving that invoice (do not close it), you can then click on Make recurring at the bottom of the screen.  There you will choose the Interval (usually the 1st day of the month) and the Start date for the next month.  If this is a lease for a specific term, you can enter an end date.  If it is month-to-month, you can leave the end date as None.


Prior to saving the recurring entry, it would be a good idea to enter the client's name in the Billing Address section of the invoice.  When that tenant is gone and there is a new tenant, you re-save the recurring invoice with the new name, keeping the address/unit #'s the same.


On the 1st day of each month, the system will automatically create the invoices that you have saved as recurring.  When you collect rent, you receive it against these invoices and deposit to the appropriate bank account.


To see outstanding rents which haven't come in by the 1st of each month, you can run any number of reports to see the addresses/customers that are still outstanding; A/R Aging Detail, A/R Aging Summary, Collections Report, Customer Balance Detail or Summary, or Open Invoices.  It just depends how you want the information displayed.  You also have many options to customize any of these reports to get exactly what you're looking for in a report.


I hope that helps!


Good luck :)

Level 1

Recieving and returning security deposits for residential tenancies.

Thanks for the detail in your response @Rochelley, I have not used a sales receipt to do this as of yet, but I may have to start. I like the idea that I would have a nice form to give to a tenant for their payment. The properties I manage on my own currently, the tenants pay by e-transfer and that has always been good enough for them as a receipt or confirmation of payment.


As I have been doing it, the transaction uses a current liabilities account, but things are going to be a little more complicated. The property manager I use in a different town is retiring and their isn't another good option. I feel like my best option will be to manage myself. I believe I will use a bank account of my own and transfer all the deposits there. This way I can link the account and ensure I'm tracking things exactly how they should be. As the owner, I don't require the funds to be in a specific place where I am.


I want to add a little more complexity to this explanation and ask how you would use the deposits when rent is not paid at the end of the tenancy to recover lost rent? To take this one step further again, what might be a good option to write off rents I wont receive? Currently I invoice and I would need to understand how to decrease this.


Thanks for your help.

Level 1

Recieving and returning security deposits for residential tenancies.

Hi @Tsommer2003,


I use the recurring transactions similar to what @Rochelley has described, but I set up each customer on their own, this way I can use the billing address for where they are and the shipping address for where they go when they leave if I need to contact them again. If I need to mail to them or contact them in any way, this is where I know I have the most up to date information. Of course if they don't want you to find them this is kind of useless because they will never give you their information. At the same time if you did get their information, you will always have it there and when I need to send registered mail for example, this is a great tool. I also find the effort in setting up a new tenant along with the recurring transactions allows me to double check to make sure the information is correct. One lingering piece of information from an old recurring invoice or expense can make things confusing for the next tenant. However, generalized good explanations where they need to be for every similar transaction is also a great idea from the example given above. I don't use anything else other than a journal program to run my rental properties, all in one place I find with tenants is the easiest.


Hope this helps.

Level 8

Recieving and returning security deposits for residential tenancies.

Hello @Jackolla ,


If you look at my detailed explanation earlier in this thread, there is a step of how to either refund the security deposit or reduce the security deposit for valid reasons, i.e. damages, unpaid rent, etc.


In my example above, I use damages as a way to reduce the security deposit.  In the case of unpaid rents, you would use your Rental income item to reduce the security deposit.  By doing so, you are also reducing the outstanding rent for that client by the amount of the security deposit.  If you are reducing the security deposit in it's entirety, then you will end up with a $0.00 transaction, which is fine.  It is the detail inside the transaction going to your different accounts that you want so the $0.00 balance is moot.


In the case of writing off unpaid rents, I borrowed this from


The CRA allows you to have losses from uncollectible debts or a portion of an uncollectible debt.

These can be deducted from your gross rental income.

The debt must fall under the following criteria to be eligible:

    • It must be owing to you at the end of the tax year
    • It must have become uncollectible during the tax year


  • It must have been included or deemed to have been included in your income for the year or a previous tax year

With every expense or loss, you have proof of your uncollectible debt. For unpaid rent, you must be able to show you pursued the tenant without success of receiving a payment.


At the point you have deemed that the rent is uncollectible (following CRA's criteria above), you would write-off that previously billed rent that is sitting in your A/R, to a Bad Debt Expense account.  This can be done by JE, crediting the A/R and debiting the Bad Debt Expense, if you are comfortable dealing with JE's.  If not, you can use your QBO forms and create a credit memo to that customer.  But you will have had to set up a Bad Debt Expense item beforehand, connecting it to your Bad Debt Expense account.


If, at any point and by some miracle you do collect a rent that has been previously written off, you would have to reverse the bad debt by debiting cash, and crediting bad debt expense.

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