Security Deposit Holding

Hi, we run a couple of holiday cottages and been using this software for several years. We take a security deposit from each guest which we return after the guest has left. Up to now I have been showing it as an income and then when repaid as an expense. My accountant has said that I shouldn’t be showing this within my accounts as at the end of my tax year I’m showing a profit of the balances so taxed on them. Is there a way to show the security deposit coming in but not as an income more in a holding account and then to show it being repaid from the same account?

Pay it into and out of a balance sheet holding account created for the task not a profit & loss account.

Read this Guide: https://www.manager.io/guides/7093. It explains how to record the deposit, which will not show up in an income account. When you settle the customer’s account at the end of their holiday, the available balance will be applied to the sales invoice. If any balance is to be refunded, enter a payment, also posted to Accounts receivable and the customer’s subaccount.

Thanks, how would I show this as I import my bank statements transactions which shows a transaction when a guest pays 1 amount covering the security deposit along with a final balance. How is the amount split? Sorry probably a dumb question!

Your question is confusing. Why is the customer paying the security deposit and the final balance in a single payment? Isn’t the security deposit paid in advance? And isn’t the final balance paid after the rental is complete? That is what I assumed in my answer.

Regardless, there are three categories of transactions involved:

  • Receipts, one of which will be the deposit, posted to Accounts receivable and the customer, but no specific invoice. Another will be settlement of the balance, posted to Accounts receivable and the actual invoice. If, for some reason, these are combined, split that receipt into two lines.
  • The sales invoice, posted to an income account. This is what is offset by the receipt recording settlement of the balance. It will also take up the unassigned deposit.
  • A payment if anything is leftover from the deposit after the invoice is settled. This is also posted to Accounts receivable for the customer to zero that balance.

As for bank statement imports, they hardly seem worth the trouble for your situation. But if you want to use them, you will either have to set up bank rules very carefully to recognize what is a deposit versus what is settlement of a sales invoice, or you will need to edit individual deposits during the importation.

Thanks for your help Tut, we take final payment and the security deposit together 8 weeks before the guest stays in 1 payment. Your reply in splitting the single entry into 2 seems the logical way to go.

Well, that is a different workflow than I imagined. So I would do things a little differently. In fact, knowing more now, I think what I would do is only slightly different from what you are already doing. But it should still keep your accountant/auditor happy. These are the steps:

  1. When a customer books a cottage, create them as a customer in the Customers tab. If they are a repeat customer, skip this step; use the subaccount already created for them.

  2. Create a sales invoice with a due date 8 weeks before the stay. Enter two line items: (1) post the rental portion to a Rental income account and (2) post the security deposit to a liability account created for this purpose, say Security deposits. This will credit your revenue for the rental and the liability account for the deposit. (This is what keeps the accountant/auditor happy.) The total of the sales invoice will be debited to Accounts receivable and the customer’s subaccount. Note: this assumes the customer is contractually obligated to pay for the stay at the time of booking. If they are not, delay the actual invoicing until they are obligated for the rental. In that case, you might want to keep track of bookings through sales orders. The key factor here is that you do not want to recognize income until it is actually earned.

  3. When you receive money, post it against the sales invoice in Accounts receivable. At this stage, the customer no longer owes you money, but the income is already recorded in Rental income and the security deposit liability is recorded in Security deposits.

  4. After the stay, issue a payment for the security deposit (or portion that is being returned), posted to Security deposits.

The difference between this and what you are doing now is that the security deposit detours through the Security deposit liability account rather than first being posted as income and then being deducted as an expense. (It isn’t income, because you never earn it. And it is not an expense because you neither purchase something nor incur a cost.)

If you must keep a portion of the security deposit, you would use the liability account as a source of funds to make right whatever went wrong. For example, if the customer damages the floor, you would pay the repair person, posting the payment to the Security deposits account rather than some expense account for maintenance. Depending on how you calculate amounts to be withheld from the security deposit, you might build up a balance in the Security deposits account over time. Eventually, you might wish to transfer some of this to income with a journal entry. Your accountant can guide you on that.

You could also get fancier with the liability account by using special accounts. The advantage of this lies in separation of deposits owed to particular customers rather than having them all lumped together. The disadvantage is more work, which may not be worthwhile, depending on the number of different customers per accounting period and your typical experience in settling affairs with them.

In all this, I assume you are using accrual-basis accounting. When dealing routinely with advances and repayments, you cannot adequately represent your position and performance unless you do.

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Liability account per customer or per cottage could be used

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Then I would set up all accounts, (customer, security deposits, even income) on a cottage basis, using the sales invoice description fields for the clients name + booking dates. This way each cottage account can be easily reconciled if required and you won’t end up with a stack of inactive Customers.

Furthermore, the booking dates would be used to identify at year end, rentals in advance. Also, if the client puts their name + cottage number / name within the bank deposit reference field, then when importing the transactions, the bank rule could assign the receipt to the correct Accounts Receivable > Cottage account.

@Brucanna, are you proposing that the cottages be set up as customers?

Yes