Security Deposit being used as rent

@Jaidayna 

Is the security deposit sitting as a liability on your balance sheet or was it recorded as income when you received it?  The IRS requires security deposits used to cover the last month's rent to be reported as income when received.  But, if it's sitting as a liability on your balance sheet, create a service item called Security Deposit (if you don't have one), and under 'Income account' in the set-up, select your security deposit liability account.  Then, create a sales receipt.  Add the rent as a positive amount on line 1 and add the security deposit item you just set up as a negative amount on line 2.  That will book the last month's rent income and reduce the security deposit liability.  The amounts will offset, leaving a $0 sales receipt.

If you previously booked the security deposit as income, create a $0 sales receipt with a note that the last month's rent has been paid in full.

You've come to the right place for advice, @Jaidayna.

Yes, Rainflurry is right. However, let me provide you with a detailed step-by-step guide so we can record your tenant's last month's rent using their security deposit in QuickBooks Online (QBO).

First, let's create an account for the security deposit. To do that:

1. In Accountant View, go to the Gear icon and select Chart of Accounts.
2. Click New.
3. In the Save account under, select Other Current Liabilities.
4. Select Other Current Liabilities in the Tax form section.
5. In the Account name, enter Security Deposits.
6. Click Save.

Second, let's create a service item called Security Deposits. Here's how:

1. Go to the Gear icon and select Products and services.
2. Click New and select Services.
3. Enter the name as Security Deposits, and under Income account, select the liability account we created.
4. Enter a Sales Price/Rate and select  Save and close.

Third, create a sales receipt. Enter the rent on the first line and the security deposit on the second line as a negative amount.

You'll also want to learn how and when to give credits to customers so they can use them to reduce the balance on their invoices. You may refer to this article for that: Create and apply credit memos or delayed credits in QuickBooks Online.

Please let us know if you need further assistance with security deposits. The Community is available 24/7 to help you. Take care and have a good one.

Thank you. This is very helpful. 

Thank you. 

Hello there, Jaidayna.

It's nice to know my colleague and Rainflurry were able to help you. If you have other concerns recording transactions in QuickBooks, please know that we're all here to help you.

Bye for now and take!

May I ask how to move the security deposit to the rental expense from a tenant perspective?  I set up the security deposit as an other asset account.  The landlord agreed to apply our security deposit to the last month's rent.  Therefore, I input a journal entry to debit the rental expense account, and credit the security deposit account.  The balance in the security deposit account and the rental expense account is correct but somehow in the vendor account, the rental expense shows an opposite amount.  Therefore, on the 1099 MISC, the total amount is less than the amount that should be reported.  How should I apply the security deposit to the rental expense account from the tenant perspective?  Thank you.

Hi there, Cathy225.

Allow me to guide you on how to move the security deposit to the rental expense.

It's important to keep security deposits separate from rental expenses in your accounting records, as they represent different types of transactions. To correct and properly manage these transactions, follow these guidelines:

1. Reverse the Initial Journal Entry: If you recorded the rental expense and security deposit together, reverse that entry, as it misrepresents the nature of each.
   • Debit: Security Deposit Account
   • Credit: Rental Expense Account
2. Record Transactions Correctly: 
   • Debit: Security Deposit (Asset account)
   • Credit: Cash/Bank Account
   • Monthly Rent Payments: Each payment should be recorded as:
     • Debit: Rental Expense Account
     • Credit: Cash/Bank Account
3. Adjust the Vendor Account: Ensure these payments are recorded against the vendor account from your cash or bank accounts for accurate reporting on the 1099-MISC form.
4. Re-check the 1099-MISC: With correct recording of rent expenses paid to the landlord/vendor, the 1099-MISC should reflect the total payments made within the year.

To guide you further you can reverse a journal entry to swap the debits and credits or delete it entirely.

Furthermore, I'm adding this resource to help you change the item type for a product or service for future reference: Change product and service item types in QuickBooks Online.

Our aim is to make your experience with QuickBooks for managing finances as smooth and efficient as possible. If you have any further questions, feel free to reach out. We're ready to assist you at any time!

Hi Jovelyn_M,

Thank you so much for your prompt response.

When I paid the landlord the security deposit, I already debit Security Deposit (other asset account, not an expense account), and credit bank.

The problem is we didn't pay for the last month's rent because the landlord agreed to apply the security deposit to the last month's rent.  Therefore, I cannot credit cash/bank.  What should I do if I cannot do below entry:

Debit Rent Expense   XXX

Credit Security Deposit (Other Asset)  XXX

Thank you,

Cathy

@Cathy225 

The response from @Jovelyn_M is incorrect.  It's very frustrating to see so many incorrect and, even worse, misleading posts from them. QB employees have no accounting background and they should have told you that journal entries are generally not recognized for 1099 purposes in QBO.  You would think QB support staff would know that much.  

To answer your question, you can record a simple Expense transaction (New > Expense) for the rent expense and pay it right from the Security Deposit asset account.  If you need to record a bill and pay the bill, move the Security Deposit to a bank Clearing Account (set one up if you don't have one) using a Transfer (New > Transfer), then pay the bill from the Clearing Account.  Both of those transactions (Expense and Bill) should report on the vendor's 1099.  Hope that helps.