How to Record a Security Deposit in QuickBooks (Landlord Guide)

Short answer: Record a refundable security deposit in QuickBooks as an Other Current Liability, not income, because the money still belongs to the tenant and you are holding it in trust. Create an Other Current Liability account called Security Deposits Held, then record the deposit received against that account so it increases the liability instead of your rental income. When you refund it, write a check against the same liability account to reduce it. You only move it to income in the year you keep part or all of it for unpaid rent or damage.

The mistake that causes the most cleanup later is coding a deposit as rent. A deposit you may have to return is not revenue, so putting it in an income account overstates the owner's taxable income and throws off both the books and any trust reconciliation. Treating it as a liability keeps it where it belongs: money you owe back.

How do I set up a security deposit account in QuickBooks?

Set up an Other Current Liability account named something like Security Deposits Held. In QuickBooks Online, go to the chart of accounts, select New, choose Other Current Liabilities as the account type, and name it. If you invoice tenants, also create a service item called Security Deposit and point its income account field at that liability account, so a deposit added to an invoice or sales receipt lands in the liability rather than in rent income. That one-time setup is what makes every future deposit post correctly with a couple of clicks.

How do I record a security deposit received?

When the deposit hits your bank account, record it so it increases the Security Deposits Held liability. If you use invoices or sales receipts, add the Security Deposit item you created and enter the amount; because the item points at the liability account, the deposit raises the liability and not your income. If you prefer to record it straight from the bank deposit screen, set the account on that line to Security Deposits Held. Either way the result is the same: your cash goes up, and an equal liability goes up, reflecting that you now hold money you may owe back.

How do I record a security deposit refund?

When the tenant moves out and you return the deposit, write a check or record the payment against the Security Deposits Held liability account, not against an expense account. Using the liability account reduces the liability back down as the cash leaves, so the two move together and nothing touches your profit and loss. Returning a deposit is not an expense, and coding it as one would understate your income, so the liability account is the correct offset every time.

How do I withhold from a security deposit for damage or unpaid rent?

When you keep part of the deposit, that kept portion becomes income in the year you keep it, and any repair you pay for is a separate deductible expense. In QuickBooks, record a journal entry that debits the Security Deposits Held liability for the amount you are keeping and credits rental income or accounts receivable, which moves that slice out of the liability and recognizes it. Then pay the repair vendor and code that payment to a repairs and maintenance expense as usual. The remaining deposit, if any, is still refunded against the liability. The table below sums up the three moves.

Where does a security deposit show up on my financial statements?

A refundable deposit sits on the balance sheet as a current liability the whole time you hold it, and it never appears on the profit and loss until you keep some of it. That is the tell-tale of correct treatment: if a deposit is showing up in your income for the month you received it, it was coded wrong. When you produce owner reports or a year-end set of books, the held deposits should be a line among your liabilities, which is where an automated tool that turns your bookkeeping export into a proper balance sheet and income statement will place them. Keeping the liability accurate month to month is also what lets a trust account reconciliation tie out.

Does a property manager record deposits the same way?

Yes, with one added wrinkle: a property manager holding deposits for owners is handling trust money that must stay separate from operating cash and reconcile every month. The accounting is identical, deposits are a liability, refunds reduce it, kept amounts become the owner's income, but the manager also has to keep each owner's and tenant's balance straight within the trust account. Converting the trust account statement to rows makes matching every deposit and refund against the ledger fast, which is the core of the workflow on our bank statement converter for property managers. To get each monthly statement into a spreadsheet you can reconcile, start with the PDF bank statement to Excel converter, and if you keep the books in QuickBooks Online, our guide to the QuickBooks QBO format covers importing the cash side cleanly.

Handled this way, a security deposit stays exactly what it is on your books: money you are holding, not money you earned. Set the liability account up once, post every deposit and refund against it, and only recognize income when you actually keep a dollar.