Exercising the creativity muscles

James Altucher says that writing and creativity is like a physical muscle that needs to be exercised in order to be functioning at it’s peak.  Think of 10 ideas per day then throw them all out.  Eventually your “idea muscle” will get stronger and ideas will mix and meld and get better.

Journal Entry for Returning a Tenant’s Security Deposit

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 …

Returning a Security Deposit

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.

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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.

Journal Entry for Tenant Security Deposit

When you receive a security deposit from a tenant, your cash balance goes up (asset) which means that you need to have a corresponding increase in a liability account.  Remember, if you’re using the double-entry bookkeeping system (which you are if you are using Quickbooks Online), all transactions need to balance out, expenses need to balance with a decrease in an asset, etc.

Here are the steps create a journal entry to account for receipt of a tenant security deposit:

1.  Create a liability account to hold the security deposit

Remember, the funds that the tenant gave to you are not yours, they belong to the tenant.  You are only holding them and you need to return them when the tenant moves out.  Money that you receive that you didn’t earn usually ends up in a liability account and a tenant security deposit is no exception.  Here is what the account creation should look like:

 

Create Liability Account

 2.  Use the following journal entry to record receipt of security deposit:

Security Deposit Journal Entry

 

So what just happened?  Your liability account that you just created got increased by $1000 and the balance of your checking account called “TCF-Business” increased by $1000.  It’s a little bit confusing that a debit causes an increase but that’s just the way it is.  When you debit an asset account, it increases.  Since these transactions are offsetting, there is no net change to your balance sheet.  When you’re ready to return the security deposit, use this journal entry.

If you have any questions related to bookkeeping transactions for rental properties, please feel free to drop me a note and I’ll respond with an answer.