If you’re returning ALL of a tenant’s security deposit (good tenant, lucky you), the journal entry is very straightforward and is simply a reverse of the journal entry for receiving a security deposit. It looks like this …
Your liability account called “Tenant Security Deposits Held” gets debited and your checking account gets credited, meaning that money leaves your checking account (in the form of a check to the tenant) and your liability goes away. Again, no net change happens on the balance sheet.
Now let’s way your tenant doesn’t leave the house in pristine condition (some repairs needed) and doesn’t pay all of their utility bills. The repairs and outstanding bills can come out of the security deposit. The way I do this is to convert the liability to income using two of my income accounts, “Rental Income:Utilities Paid by Tenant” and “Rental Income:Fees for damages”. Go ahead and create these income accounts now, then use the following journal entry to account for the partial return of a security deposit along with keeping some for repairs and unpaid bills.
In this example, $850 goes back to the tenant (as a check written out of the account called “TCF-Business”) and a total of $150 becomes income. The expenses that will occur because of the repairs and utilities can then be treated as normal expenses.
If you have any question related to returning security deposits, or any other real estate bookkeeping-related issue, please let me know and I’ll do my best to explain.