Security Deposit Accounting for Apartment Buildings: The Liability per Unit, the Account and the Move-Out Statement

Is a security deposit an asset or a liability in an apartment building's books?

A liability. The building holds the money, and it owes it back to the tenant at the end of the lease. It becomes income only if the lease allows the owner to keep part of it.

The cash sits in a bank account, so it is an asset. The same amount is owed back, so it is also a liability. The two cancel out, and the deposit adds nothing to what the owner has. Deposits are the money-held part of apartment building bookkeeping.

How do you record a security deposit when a tenant moves in?

Record the cash in the account it was paid into, and a liability of the same amount under security deposits held, tagged to the unit. Nothing is recorded as income.

1. 1Record the cash where it was paid in. At Birch Way, deposits go into the deposit account: +$750.
2. 2Record the same amount as a liability under security deposits held, tagged to the unit: +$750.
3. 3Add the line to the deposit ledger: unit, tenant, amount, date received. Record no income.

Move-in at Birch Way, invented data

The account names used here come from the chart of accounts for an apartment building.

How do you keep track of security deposits for every unit in an apartment building?

Keep a deposit ledger with one line per unit: tenant, amount, date received. Each month its total must equal the security deposits held account in the books.

Birch Way has 47 rented units, and each one has a $750 deposit. So the ledger has 47 lines. Here are the first 5 and the total.

Deposit ledger, Birch Way, invented data

The 3 empty units have no line. The ledger total, $35,250, must equal the security deposits held account in the books every month.

When a building is bought, the seller's deposit list arrives at closing, covered in setting up the books when you buy an apartment building. That list becomes the first version of this ledger.

Where should an apartment building hold tenant security deposits?

In the books, the test is the same wherever the cash sits: money set aside must equal the deposit ledger. Whether a separate or trust account is required is a state law question for your attorney.

Birch Way keeps deposits in their own account. It holds $35,250, the same as the ledger. If the deposits sat in the operating account, the test would be the same: the ledger total against the money set aside. It would just be harder to see. Checking the deposit account against the ledger is one step of bank reconciliation for an apartment building.

Whether your state requires a separate account, a trust account or interest paid to the tenant is a legal question for your attorney. We can set up the books for any of them.

How do you record a security deposit at move-out?

Take the unit's deposit off the liability. The part returned leaves the bank. The part applied to unpaid rent clears the tenant's balance. The part kept for damage becomes income.

There are 3 cases. In each one, a tenant at Birch Way moves out with a $750 deposit held.

Returned in full

The unit is clean and the rent is paid. The whole deposit goes back.

Applied to unpaid rent

The tenant left owing $400 in rent. The deposit covers that first, and the rest goes back. A deposit applied to unpaid rent closes a gap first found in rent roll vs bank statement.

Part kept for damage

At Birch Way one move-out needed cleaning. $180 was kept and $570 went back.

The $180 becomes income at move-out, when it is kept. Whether kept deposit money is taxable, and when, is a question for your CPA.

What goes on an apartment move-out statement?

5 lines: the deposit held, unpaid rent applied, each charge kept with its reason, any interest owed, and the amount returned.

Move-out statement, Birch Way, invented data

Each charge kept shows its reason, so the tenant can see what it was for.

Pet deposit vs pet fee vs pet rent: which is a deposit and which is income?

A refundable pet deposit is a liability, recorded with the security deposit. A one-time pet fee is income when charged. Pet rent is monthly income, recorded as other income.

One unit at Birch Way has a pet. Here are its 3 pet charges and where each one goes.

Pet charges at Birch Way, invented data

The refundable $300 is part of that unit's $750 line in the deposit ledger, so the ledger total stays $35,250. Pet rent is one of the lines in other income in an apartment building.

How do security deposits change the cash an apartment owner can spend?

Deposit money sits in the bank and is not the owner's to spend. Subtract the deposit ledger total from the bank balance to see the cash that is really free.

Here is Birch Way at the end of the month. The 3 bank accounts hold $112,000. Some of that money is owed to others.

Birch Way, cash that looks free and is not, invented data

$41,000 of the $112,000 is owed back or set aside: $35,250 of deposits and $5,750 of reserve. After $78,000 of bills, real cash is -$7,000.

Rent paid early is also money held for a tenant, covered in prepaid rent received.