What are security deposits?

Definition

A security deposit is money you pay up front that a landlord or vendor holds until the contract ends or you settle up. On the books, this is an asset, not rent expense and not a cost of the month you paid it.

You expect the cash back, or to have it applied later, as long as you keep the terms. Until then the other party holds the money, and your books still show the claim.

Cash-basis books sometimes expense the check by mistake. Accrual books keep the deposit on the Balance Sheet until it is refunded or applied.

This balance is your money sitting somewhere else. It is not restricted cash that you still hold in your own account.

Where it shows up

Balance Sheet: Located with the long-lived assets when the lease runs more than a year.

P&L: Related to rent, not to the deposit itself.

Cash flow: Increases in this account, reported cash from operating activities decreases.

See also: Non-Current Assets · Rent Expense · Account Reconciliation

When you look at your Balance Sheet, a deposit on a multi-year yard lease sits with the non-current assets. A deposit you expect back within a year often sits with other current assets instead.

A high total usually means large leases or many yards, stalls, or vendor accounts. A low total usually means few deposits, or that old ones were already refunded or applied.

The profit and loss statement does not list this account as a line. Rent expense is the related occupancy cost; the deposit itself is not that cost.

On the Statement of Cash Flows, paying the deposit is an operating outflow. Cash falls, and this asset rises.

How it works

The deposit gets onto the books when you write the check or send the wire. You debit this account and credit cash.

Nothing hits the P&L at that moment. You have swapped one asset for another.

The lease or other contract says when the money comes back, and what damages or unpaid rent can be taken from it. Keep that agreement with the supporting schedule so you can prove the balance.

If the remaining term is more than a year, the line stays non-current. If the refund is due within twelve months, move it with the other current assets.

While the deposit sits, you still record rent each period as usual. Do not amortize the deposit as if it were prepaid rent unless the contract actually applies it that way.

When the landlord refunds you, debit cash and credit this account. The asset goes away, and cash comes home.

When the landlord keeps it for last month's rent or for repairs, you credit this account and debit rent or the repair cost. That is the moment the deposit becomes an expense.

Reconcile the ledger to the lease file and to any landlord statement. A deposit that was refunded last year should not still sit on the books.

Example

A trucking company leases a yard for its trailers. The landlord requires an $8,000 security deposit before the first truck rolls in.

The company records:

Debit: Security deposits $8,000

Credit: Cash $8,000

Security deposits go up by $8,000, and cash goes down by $8,000. The Income Statement does not show an $8,000 rent charge that day.

The Balance Sheet is the same size, with a different mix of assets. Monthly rent will hit the P&L on its own schedule.

Three years later the company leaves the yard in good shape, and the landlord returns the $8,000:

Debit: Cash $8,000

Credit: Security deposits $8,000

Cash comes back, and the deposit account falls to zero. No rent expense is recorded on the refund.

Common mix-ups

A security deposit is not rent expense. The check leaves the bank now, but the cost of occupying the yard is the rent each period, not this asset.

This account is not restricted cash. Restricted cash is money still in your account that you cannot spend freely; a deposit has already left and sits with the landlord.

A deposit is not prepaid rent unless the contract says it will be applied to a named period. Until it is applied or refunded, it remains a claim you expect back.

Related terms

• Non-Current Assets: Assets the business expects to hold and use for more than a year.
• Rent Expense: The periodic cost of occupying leased space.
• Other Current Assets: A catch-all line for small short-term assets that do not warrant their own account.
• Account Reconciliation: Proving that a ledger balance agrees to independent support.
• Restricted Cash: Cash that is set aside or pledged and cannot be used for general operations.
• Supporting Schedule: A detailed worksheet backing up a single line on the financial statements.
• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.
• Contract: The binding agreement that sets what will be delivered and what will be paid.