The journal entry for a security deposit depends on which side of the lease you sit on. A tenant debits a Security Deposit asset and credits Cash; a landlord debits Cash and credits a Security Deposit Liability. The money sits on the balance sheet until the lease ends, so it does not hit rent expense or rental income when it changes hands.
Tenant’s Journal Entry
Paying a deposit is not spending. The cash is still yours; it’s just held by the landlord. That makes it an asset, usually called “Security Deposit” or “Deposits – Leases.”
For a $4,500 commercial deposit:
- Debit: Security Deposit (asset) — $4,500
- Credit: Cash — $4,500
Classification matters. If the lease runs more than 12 months, the deposit belongs under Other Noncurrent Assets, not current assets. Current assets are the ones you expect to convert to cash within the operating cycle, and a deposit tied up for three or five years does not fit. Parking it in current assets inflates working capital on paper.
Landlord’s Journal Entry
The landlord’s side is the mirror image. Receiving a deposit is not revenue; it creates an obligation to give the money back. Book it to a liability account, usually “Security Deposit Liability” or “Tenant Deposits Payable.”
Same $4,500:
- Debit: Cash — $4,500
- Credit: Security Deposit Liability — $4,500
The liability stays long-term as long as the tenant could not demand it back within 12 months. Once the lease has less than a year to run, reclassify it to current liabilities.
One bookkeeping note on escrow. Where state law requires holding deposits in a segregated bank account, the journal entry doesn’t change. The cash debit simply references the restricted escrow account rather than the operating account, so label it clearly in your chart of accounts.
Entries When the Lease Ends
At lease end the deposit is either returned in full, returned in part, or kept entirely. The journal entries follow the outcome.
Full Refund
A full refund reverses the original entries on both sides.
Landlord:
- Debit: Security Deposit Liability — $4,500
- Credit: Cash — $4,500
Tenant:
- Debit: Cash — $4,500
- Credit: Security Deposit (asset) — $4,500
Partial Retention
Say the landlord keeps $1,000 for damage and refunds $3,500. The landlord clears the entire liability, records the cash paid out, and recognizes the retained portion as income:
- Debit: Security Deposit Liability — $4,500
- Credit: Cash — $3,500
- Credit: Other Income (or Repair Reimbursement Revenue) — $1,000
The tenant removes the full asset, records the cash received, and expenses the forfeited portion:
- Debit: Cash — $3,500
- Debit: Repair Expense (or Loss on Deposit Forfeiture) — $1,000
- Credit: Security Deposit (asset) — $4,500
Pick the expense account with care. If the landlord’s itemized statement says the deduction was for damage, Repair Expense keeps the cost visible next to your other maintenance spending. If the deduction was for unpaid rent, code it to rent expense. A generic “miscellaneous loss” bucket hides information that your accountant or auditor will later have to reconstruct.
When the Deposit Is Really Last Month’s Rent
A common trap: the lease says the deposit will be applied to the final month’s rent. The IRS treats that as advance rent, not a security deposit, and requires the landlord to include it in income in the year it’s received, regardless of accounting method.1Internal Revenue Service. Publication 527 (2025), Residential Rental Property
That changes the entries from day one.
Landlord:
- Debit: Cash — $4,500
- Credit: Rental Income (or Unearned Rent, if deferring to the future period) — $4,500
Tenant:
- Debit: Prepaid Rent — $4,500
- Credit: Cash — $4,500
When the final month arrives, the landlord moves any unearned rent to earned rent, and the tenant moves prepaid rent to rent expense. There is no liability on the landlord’s books and no receivable on the tenant’s, because the money is not coming back. If the lease calls the payment a “security deposit” but earmarks it as the final month’s rent, follow the substance over the label.
Interest Accrual Where State Law Requires It
A number of states require landlords to pay interest on held deposits. Rates are typically low, often around 1% or tied to what the account actually earns. The obligation still accrues on the books before any cash moves.
On a $4,500 deposit held for a year at 1% simple interest, the accrual is $45.
Landlord:
- Debit: Interest Expense — $45
- Credit: Interest Payable — $45
Tenant:
- Debit: Interest Receivable — $45
- Credit: Interest Income — $45
When the interest is actually paid, usually with the refund at lease end, both sides clear the payable and receivable against cash. If your state doesn’t require interest, skip these entries entirely. Some states that do require it also let the landlord withhold a small administrative fee before paying the tenant.
Non-Refundable Deposits Under ASC 842
Refundable deposits sit outside ASC 842. They stay a receivable for the tenant and a payable for the landlord, exactly as shown above, and they do not enter the lease liability or right-of-use asset calculation.
Non-refundable deposits behave differently. Because the tenant will never get the money back, the payment is economically the same as a lease payment. Under ASC 842, a non-refundable deposit gets folded into the lease payment stream, which changes the right-of-use asset on the tenant’s balance sheet. If part of the deposit is non-refundable, or the deposit converts to rent at any point in the lease, that portion belongs in your lease payment schedule rather than a deposit account. Read the lease terms before writing the entry.