Step 1: Set up a liability account
First, let's setup a liability account. We use a liability account because refundable deposits are an obligation, not revenue. A great example of this is when a landlord collects a security deposit at the beginning of a lease. The landlord is required by law to remit the deposit back to the tenant within a certain number of days after the end of the lease, therefore this is needs to be recorded as a liability.
(If a deposit is non-refundable, you will instead need to record this as unearned revenue.)
To create a liability account, follow these steps.
Step 2: Record the deposits you receive
- Create a new deposit from the Banking Navigation
- Scroll to the bottom of the pop-up to the 'Add a New Deposit' section
- Enter the related customer and deposit amount
- Choose 'Refundable Deposit' as the financial account.
The deposit is now recorded. It will appear in your Balance Sheet in Reports and will be associated with the specific customer.
Step 3: Record the return of the 'Refundable Deposit' to the customer
- Create an new Expense
- Enter the customer information and cash account from which the funds are leaving
- Select 'Refundable Deposit' next to the Expense field. This should already be mapped to liabilities in your Chart of Accounts
- Click 'Save & Close'