17 Nov Vendor Security Deposits
Vendor Security Deposits
Q – How do I enter a security deposit that I made to my landlord into QuickBooks? Do I enter it as “other asset” and at the end of my lease term, pay my rent from that? I understand that because it is a prepayment, I cannot deduct it from my taxes at this time.
Submitted by Bob
A – Security or refundable deposits can be either “other current asset” or “other asset” type accounts depending on the length of time the deposit will be held. It is a year or less, it should be classified as current, longer than a year and the “other asset” type account should be used.
Several examples of what a security or refundable deposit may be are: a security deposit held by a workers’ compensation insurance company; security deposit required when signing a rental or lease agreement; or a refundable deposit with a utility company that will be refunded when a payment history has been established.
When deposits are paid they are often incorrectly coded to an expense. While this may provide some benefit from a tax standpoint, it is not correct. The other disadvantage to handling security or refundable deposits as an expense is that they are quite often forgotten about, and, therefore, not ever received back.
When the security deposit is no longer needed, it will either be:
- Returned by the vendor (occasionally with interest) and will be deposited into the bank account. The deposit should be coded to the asset account for the security deposit and interest income for any additional amount received.
- Applied to the final payment that is due. In this case, a journal entry should be created with the expense account used for the debit and the asset account used for the credit.
Check with your tax accountant about the deductibility of the payment. Typically security deposits are not deductible at the time they are paid, nor are they taxable at the time they are returned. However, any interest earned on the security deposit while it is held by the landlord will typically be taxable.