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.

Reader Question – Is This Doable?

Question from a reader:

Hi there, Matt. I was wondering if you could give some advice as to how to get this ball rolling. I’m a full time college student, married, with about 10k saved up (both of us work minimum wage). I found a house that I am very interested in buying, and its currently under foreclosure for 59,800 (I have a couple back up properties if things go south with this one). We currently spend 400 a month on rent which comes out of our wages, plus 150 a month on utilities. I also have a car loan out (125.00/mo), which should be paid off by April. Is this even doable? Any suggestions? Thanks in advance!

Answer:

Thanks for writing in.  I have talked quite a bit on this blog about buying houses outside of traditional ways, not using banks or Realtors for instance.  That said, buying a house without bank financing should be looked at as a secondary option and might not work well in this case.  Reason being that since this is a foreclosure, it will probably be tough to directly contact the buyer and negotiate a deal with him or her.

Since you both have jobs, it’s possible that you could actually apply for and possibly be approved for a bank loan.  I would recommend going to a small local bank or credit union to see if you can get a loan for this.  You would be able to put down 10k theoretically which would lessen the bank’s risk considerably.  Loan to value would be within their bounds as long as the appraisal comes in at a sufficiently high valuation.

So step one, go to a bank and apply for a loan.  Bring them all of your financial information, just like you listed it here and make your case.  Getting a bank loan is almost always better than a land contract since you will probably pay a lower interest rate.

If you get denied, try another credit union or small bank.  If that still doesn’t work, see about trying to contact the owner and making a deal.  I’m not familiar with the situation in your state but it’s possible that the owner still may have some degree of control of the property.  If the house has gone through the whole foreclosure process then this obviously would not work.

One final thought … If this property has gone through the whole foreclosure process then it is not owned by whoever had the loan originally, probably a bank.  See if you can contact them directly about buying the property and having them finance it.

Contact me if you have any more details on this.  I would love it for you to get this property.  It’s impressive that you are looking into buying a property while you’re in college.  Very few folks out there even try this.  Keep me posted!

Matt

 

 

 

Quickbooks Journal Entry – 7 Properties to Commercial Loan

The following is the journal entry I used to record the closing of a commercial loan.  In this transaction, I put 7 total properties under a commercial loan, 6 were originally on land contracts and 1 was fully paid off.  Here is a summary of each of the line items:

1.  Type of account: Long Term Liabilities.  The loan value was $245,000.

2.  Type of account: Other Current Liabilities.  The bank also offered me a line of credit, $4452,96 of which was contributed to closing.

3 – 8.  Type of account: Long Term Liabilities.  These were the outstanding amounts on the 6 land contracts that were paid off.  To get specific, this is the principle balance as of the start of the month that closing took place.  In this case, the closing date was July 20th, 2014 so these values were as of July 1st, 2014.  After this transaction, there is a zero balance on all of these accounts.

9 – 15.  Type of account: Expense.  When real estate changes ownership or financing changes, upcoming property taxes need to be paid as part of closing.  This was a huge expense but would have had to be paid the next September regardless.

16.  Type of account: Expense.  Closing costs due to the title company and bank.

17 – 22.  Type of account: Expense.  These line items are the interest accrued on the 6 land contracts between July 1st and July 30th.  Interest is paid in arrears and would have been paid on August 1st with my regular land contract payments.

Cash at closing.  Type of account: Checking account.  Although not noted below, the actual transaction I edited in Quickbooks was a payment for $11,010 that I brought to closing.

 

If you have questions about this transaction, feel free to comment below or contact me here.

 ACCOUNTDESCRIPTIONAMOUNTBILLABLECLASS
1Commercial LoanOriginal amount for commercial loan-245000
2Line of CreditTransfer from line of credit-4452.96
3House 1 LoanPayoff of House 1 land contract25342.98House 1
4House 2 LoanPayoff of House 2 land contract31377.17House 2
5House 3 LoanPayoff of House 3 land contract33548.86House 3
6House 4 LoanPayoff of House 4 land contract48077.11House 4
7House 5 LoanPayoff of House 5 land contract28441.13House 5
8House 6 LoanPayoff of House 6 land contract73330.54House 6
9Property TaxesHouse 1 property taxes1096.81House 1
10Property TaxesHouse 2 property taxes1849.94House 2
11Property TaxesHouse 3 property taxes957.78House 3
12Property TaxesHouse 4 property taxes2613House 4
13Property TaxesHouse 5 property taxes5533.66House 5
14Property TaxesHouse 6 property taxes3813.71House 6
15Property TaxesHouse 7 property taxes1213.08House 7
16Closing Costs2136.35
17Mortgage Interest132.88House 3
18Mortgage Interest342.55House 5
19Mortgage Interest224.55House 6
20Mortgage Interest150.67House 1
21Mortgage Interest123.45House 2
22Mortgage Interest156.74House 4