There are many ways that property managers post security deposits. The Tenant File is flexible enough to do it using various methods. Many states require that the Tenant’s security deposits be accounted for separately, requiring a separate bank account to hold those deposits.
The Tenant File allows for up to 10 bank accounts. One main Property Management Account, called the Primary Account, and up to 9 other bank accounts. The other bank accounts are normally used for security deposits, trust accounts, escrow accounts, or you may just need a separate account for a specific Owner or Property.
When a Tenant moves in, you will need to 'Charge' the Tenant Ledger with their Security Deposit, similar to charging a Tenant Ledger with their Rent. When the Security Deposit is paid, you 'Credit' the Tenant Ledger (using 'Deposit Received'), which will zero out the deposit charged.
We have included two methods to handle the disposition of Security Deposits. Your state requirements may require a different method. If you don’t have the Account Categories shown below, you will need to set them up under 'Add/Edit Accounts' in the Tenant File. Use your own wording for the Account Name that you set up. (These names are longer for descriptive purposes).
Method 1: This has the least accounting trail, but can be used if you write your checks by hand or another program and have accounting elsewhere. It is also a method that can be
used if you move your tenants to ‘Inactive’ prior to completing the ‘Disposition of the Security Deposit’.
When the Tenant moves in, you charge the Tenant Ledger, and then credit the Tenant Ledger when the Security Deposit is paid. (You would create a Deposit for the ‘Security Dep Received’ either to your Property Management account or to your Trust Account.) When the Tenant moves out, you write a check to the Tenant for the security deposit, less any amount forfeited, but the check is not posted in the Tenant File. You can use the Tenant Information NOTE section (in the Inactive database if you have transferred the Tenant) to retain the details regarding the disposition of the deposit. If any of the deposit is to be forfeited to the Owner, you would post that amount to the Unit Ledger (in the Active database) under 'Deposit Forfeited'. This would be an Income Category, which would credit the Owner for the forfeited amount.
When Tenant Moves IN Amount Post To
Security Dep Charged ($500.00) Tenant Security Dep Received $500.00 Tenant
Method 2: This has a better accounting trail
When the Tenant moves in, you charge the Tenant Ledger (Security Dep Charged), and then when the deposit is paid, you credit the Tenant Ledger (Security Dep Received). (You would create a Deposit for the ‘Security Dep Received’ either to your Property Management account or to your Trust Account.) This is a “wash” but allows an accounting trail. When the Tenant moves out, you post a ‘Security Dep FROM Escrow’ (Income Account) to bring the funds back into the Tenant ledger. (If you use a separate account for your Security Deposits, you would write the check out of the ‘Trust Account’ and make a deposit into your ‘Property Management Account’.) At this point, you would pay out any expenses incurred by the Tenant (checks created to Vendors, etc.), and then write a check (Security Dep Refunded) to the Tenant for the remaining funds. If any of the deposit is to be forfeited to the Owner, you would post that Expense to the Tenant ledger (Tenant Deposit Forfeited) and then post that same amount to the Unit Ledger under 'Deposit Forfeited'. This would be an Income Category, which would credit the Owner for the forfeited amount.
This takes into account that you are keeping your security deposits separate from your property management operating account.
Example one: This shows a partial deposit refund – See ‘Security Deposit Disposition’ in the next chapter to have the Tenant File process the transfers and create checks for you.
When Tenant Moves IN Amount Post To
Security Dep Charged ($500.00) Tenant Security Dep Received $500.00 Tenant
When Tenant Moves OUT Amount Post To Security Dep FROM Escrow $500.00 Tenant Security Dep Refunded (check) ($400.00) Tenant Tenant Deposit Forfeited ($100.00) Tenant
Post to Unit Ledger Amount Post To Deposit Forfeited to Owner $100.00 Unit
Example two: This shows a full deposit forfeited – See ‘Security Deposit Disposition’ in the next chapter to have the Tenant File process the transfers and create checks for you.
When the Tenant moves in, you charge the Tenant Ledger (Security Dep Charged), and when the deposit is paid, you credit the Tenant Ledger (Security Dep Received). This is a “wash” but allows an accounting trail. When the Tenant moves out, you post a ‘Security Dep FROM Escrow’ (Income Account) to bring the funds back into the Tenant ledger. (If you use a separate account for your Security Deposits, you would write the check out of the ‘Trust Account’ and make a deposit into your
‘Property Management Account’.) If the entire deposit is to be forfeited to the Owner (the Tenant does not receive any funds back), you would post that Expense to the Tenant (Tenant Deposit Forfeited) and then post that same amount to the Unit Ledger under 'Deposit Forfeited'. This would be an Income Category, which would credit the Owner for the forfeited amount.
When Tenant Moves IN Amount Post To
Security Dep Charged ($500.00) Tenant Security Dep Received $500.00 Tenant
When Tenant Moves OUT Amount Post To Security Dep FROM Escrow $500.00 Tenant Tenant Deposit Forfeited ($500.00) Tenant
Post to Unit Ledger Amount Post To
Deposit Forfeited to Owner $500.00 Unit
There are other ways to post the Security Deposits. You are free to set up as many Account
Categories as you wish, and use your own method. Since states have different regulations regarding handling security deposits, we cannot give advice on the method you should use.
You will need to decide how you want to set up the accounting for the above transactions.
Note: If you keep the Deposit funds in a separate check account, you would write a check from that
‘Trust Account’ (when the Tenant moves out) and deposit the funds into your ‘Property Management’
account. At this point, all checks to Vendors and to the Tenant are paid out of the ‘Property Management Account’. If your accounting system is set to pay expenses from the ‘Trust Account’, you will still need to post the transactions in the Tenant ledger as indicated above to show where the funds were paid to.
Starting with Tenant File Version 8, there is a quicker way to post security deposit disposition. To use this feature, click on ‘Miscellaneous’ menu choice from the Main Menu, then choose ‘Security Deposit Disposition’. You will see the following screen:
Simply select the desired tenant from the dropdown list, and the currently entered security deposit will be filled in for you. It is very important that you make sure that all of the information and accounts shown on your screen are correct. This information is pulled from your Tenant Ledgers, therefore if the information does not show to be correct, exit and view the ledger. The settings on the screen are below:
Transfer Security Deposit into Tenant Ledger: This will show the amount that will credit the Tenant Ledger. Typically, this is the full amount of the security deposit. The purpose is to show that money was transferred out of escrow and back into the Tenant’s Ledger.
Subtract any amount that you want to charge the Tenant: If you have already posted any
expenses into the Tenant Ledger (and don’t plan to), this will allow you to subtract the amount of any expenses that you want to deduct from the security deposit before refunding it. Note: There is an additional option to post a refund into the Unit Ledger (owners accounting) if you wish.
Refund the remaining Security Deposit to the Tenant Ledger: This is the final amount to be refunded to the tenant. If you want the Tenant File to create a check to the tenant, just click the
‘Create Tenant check’ box and enter the tenant name and any remark that you want to show.
The above settings will result in postings to the Tenant Ledger as follows:
12/20/2013 Escrow to Tenant $1400.00 (this will credit the Tenant Ledger) 12/20/2013 Security Dep Expense ($ 500.00) (this will debit the Tenant Ledger) 12/30/2013 Security Dep Refund ($ 900.00) (this will debit the Tenant Ledger)
Some managers keep all of the security deposit money in one bank account, but only write checks from an ‘operating account’. You can accommodate that by clicking the option button labeled ‘I first transfer from escrow to another account’ under ‘How do you handle your security deposits?’.
This will display other options on the screen allowing you to show the transfer, then to create the disposition of the security deposit.