A security deposit is not income. It is money the landlord holds on behalf of the tenant and, in most cases, has to give back. Getting the accounting wrong is one of the most common mistakes in rental books: deposits are mixed into rental income, spent, and then missing when the tenant leaves. This guide shows how to record a deposit from the day it is received to the day it is refunded.
Rules on deposits depend on your tenancy agreement and local law. This guide covers the accounting, not the legal position.
Why a deposit is a liability When you receive a deposit, you now hold the tenant's money. The cash is yours to use only as far as your agreement allows, and the obligation to return it is recorded as a liability. It should never appear in income unless and until you are entitled to keep part of it.
If it is booked as income, two things go wrong: Your profit looks higher than it is. When the tenant leaves, there is no record of what you owe back. The life of a deposit
- Agreed The lease states the deposit, for example Rs 90,000 for an apartment with Rs 45,000 monthly rent.
- Received, in full or in parts Many tenants pay a deposit in instalments. Record each receipt on the day, with the account it was paid into (bank or cash), and issue a receipt.
| Date | Received | Total held | Still to collect |
|---|---|---|---|
| 1 January | 50,000 | 50,000 | 40,000 |
| 1 February | 40,000 | 90,000 | 0 |
- Held
While the tenancy runs, the deposit sits in a liability account. It does not change.
Settled at move-out
At the end of the tenancy you compare what the tenant owes (unpaid rent, utilities, damage) against what you hold.
Refunded, with deductions
You return what remains.
The journal entries
On receiving Rs 50,000 in cash or bank:
| Account | Debit | Credit |
|---|---|---|
| Bank or Cash | 50,000 | |
| Security deposits held (liability) | 50,000 |
On refunding Rs 90,000 with Rs 12,000 of deductions:
| Account | Debit | Credit |
|---|---|---|
| Security deposits held (liability) | 90,000 | |
| Repairs recovered (or the account for the deduction) | 12,000 | |
| Bank | 78,000 |
The liability is cleared to zero, the deduction is recognised as a recovery, and the bank shows only what was actually paid back.
Refund only what was actually received
If a tenant paid Rs 50,000 of a Rs 90,000 deposit and then left, the refund is based on the Rs 50,000 held, minus deductions. Refunding on the agreed figure would pay back money you never received.
Itemise every deduction
Each deduction should have its own line with a reason and an amount, so the tenant can see how the figure was reached.
| Reason | Amount (Rs) |
|---|---|
| Unpaid rent, last month | 8,000 |
| Repainting of one room | 6,000 |
| Missing key replacement | 1,000 |
| Total deductions | 15,000 |
Refund = 90,000 held − 15,000 deductions = Rs 75,000.
Keep a deposit report
Once a month, list every deposit: tenant, apartment, agreed amount, received so far and balance held. The total should equal the balance of your security deposit liability account. If they differ, someone has recorded a deposit in the wrong place.
Common mistakes Booking deposits as income. Spending deposits without a record. You must still be able to refund. No receipt for instalments. The tenant cannot prove what they paid. Refunding the agreed amount instead of the received amount. Deductions without a reason. This is where disputes start. Deleting a deposit entry to correct a mistake. Reverse it and post a correct one, so the trail is kept. How OneAccounts Property Management does it
The deposit is recorded as a liability when the lease is created. You can collect it in instalments into a bank or cash account of your choice, and print a deposit receipt PDF for each. At move-out, the refund is calculated from what was actually received, with each deduction itemised and posted to its own account. The deposit shows as held, partly refunded or refunded. The deposit report and the lease settlement pull from the same records. See OneAccounts Property Management.
Frequently asked questions Is a security deposit income?
No. It is a liability until you are entitled to keep some of it.
Can I use deposit money to pay expenses?
That depends on your agreement and your policy. If you do, you still owe the money back, so keep a record.
Can a deposit be paid in instalments?
Yes. Record each instalment with a receipt and track the balance still due.
What if deductions are more than the deposit?
You can claim the shortfall from the tenant. Record the unpaid amount as a receivable from the tenant.
Where do I record a deduction for damage?
As a recovery to an income or expense-recovery account, with a clear description, not as ordinary rent.