How to Account for Refundable Deposits (Article)

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

1. Create a new deposit from the Banking Navigation
2. Scroll to the bottom of the pop-up to the 'Add a New Deposit' section
3. Enter the related customer and deposit amount
4. 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

1. Create an new Expense
2. Enter the customer information and cash account from which the funds are leaving
3. Select 'Refundable Deposit' next to the Expense field. This should already be mapped to liabilities in your Chart of Accounts
4. Click 'Save & Close'