I just started using Stessa and I am inputting all of my previous transactions. I had a previous tenant where I kept their entire security deposit. How would I enter that transaction?
Do I enter the security deposit when I received it and then nothing else?
Do I enter the amount of the security deposit when I received it and then enter it as income when I kept it?
Thanks!
That’s a great question - Here’s how I did it. Like you said added to income then off set with the expenses I incurred to keep the deposit, posted to the specific unit with detailed notes and added the tenant letter explaining the deductions as a document - again tied to the unit. Best I could figure out and if I am consistent at lease I can explain to my accountant. I’ll be interested to see a reply from STESSA.
From a bookkeeping perspective, do we really have the deposit “accounted for” anywhere? It’s just a holding, not income, until it’s formally withheld. At that point, I think I usually just put it down as the top-level “Security Deposits” category (with it showing as refund since it’s a positive amount coming in). The actual repairs you’re doing would be categorized normally, I believe.
I’m no expert, though, just how I’ve handled it in the past.
@ehaug87 @rwsinterests @pete Here’s what we recommend with respect to security deposits…
When you receive the deposit, categorize it as “Money In” to “Security Deposits.” When you apply it to outstanding rent, record a new transaction as “Money Out” from “Security Deposits” for the amount being applied to rent and also record the “rent” you’re receiving as “Income > Rents.” That way your net in/out is correct for Security Deposits and you’re capturing the rental income as usual.
Finally, you’ll also want to reduce the security deposit amount shown for this tenant on your Leases & Tenants page by the same amount so that you don’t mistakenly refund too much upon an eventual move-out.
@devin Is the “Security Deposits” category not part of any calculation? Just a separate “pool” of money to track, but treated different from Income–is that right? I’m guessing so, based on your explanation.
Slightly tangential, but this gets at a separate request to see a breakdown (with examples) of when to use the various categorizations…
@pete Yes, the Security Deposits category is primarily for tracking purposes. It is not considered income or rent and does not appear on the Income Statement or Net Cash Flow reports. The net balance of all ins/outs to the Security Deposit category does however show on the Balance Sheet report.
To expand on this some, if the security deposit is not being applied to rent and just a portion is just being withheld, do I need to apply the difference to an Income account? For example:
-Collect $2000 security deposit at Tenent move in ($2000 - Money In to Security Deposit)
-Tenent moves out but $1000 of security deposit is withheld and $1000 is returned. ($1000 - Money Out of Security Deposit)
Now balance sheet shows $1000 net positive in security deposits.
How do I balance this? Should I move remaining $1000 Money out of Security Deposit? If so, does it need to show as income somewhere?
@bradleyhager The question here is what is the $1000 of withheld security deposit being applied to, if not outstanding rent? You’ve handled the $1000 that is being returned perfectly, by the way.
If the withheld amount is to cover damage to the unit, then we would recommend recording it as $1000 Money Out of Security Deposits + $1000 Money In (refund) to whatever R&M account got hit with the actual repair expenses. Hope that makes sense!
I was a little confused and it took me a long time to figure out how to account for the security deposit when a tenant moves out. I like to account for it in two parts. The first part is to move money out of the Security Deposit category. This is done by adding transactions for damages and money refunded to the tenant, with the category set to Security Deposit. The sum of all these transactions should be the total security deposit amount. Since transactions moving in and out of the Security Deposit category are treated as transfers, they do not show up in the income or operating expenses sections of the financial statements. After adding these transactions, you will see the Security Deposit category on the Income Statement and Balance Sheet reduced by the total security deposit amount.
The second part is to account for the money on the financial statements. The amount of money coming out of the security deposit for damages must be put into the business so repairs can be paid. This is accounted for with a transaction showing money moving into a category, such as a Repairs & Maintenance refund or Income>Rents. The category you choose depends on where you want it to show up on the financial statements.
Once the money has been brought in, you can pay a contractor to repair the damage and account for it with a regular transaction, as you usually do.
After doing this, you should no longer see the security deposit on your financial statement, the withheld deposit for damages will show as a positive amount, and the repaired damages will show as a usual expense.
For Pro members, you can create a Test Portfolio with a fake property so you can run though a scenario or two and get a feel for how it works.
For example, your tenant has a $2000 security deposit. After conducting a move-out inspection it is determined that there is $400 in damages they need to pay for. You create a $400 Mony-Out transaction with a Security Deposit category for the damages, and another transaction of $1,600 with a Security Deposit category to refund the tenant. This will zero out the Security Deposit balance.
To account for the Security deposit on the financial statements, create a Money-In transaction of $400 with a category of something like Repairs & Maintenance refund or Income>Rents. The $400 is now on the financial statements as a positive amount. If you pay someone to make the repairs, you will enter that as a transaction like you usually do. You do not need another transaction to show you refunded the leftover part of the security deposit.
On my previous example I found that when you create a transaction to bring the deposit money into the business and use an Income category, it puts it on the Tenant’s account and messes things up. Just use an expense category like Repairs & Maintenance and it will work better.
@ jkwpropertiesllc1 - thank you very much for your elaborate reply; its really clarified things. What you explained all seems to work, but it leaves the tenants ledger balance inaccurate as recording money-in against R&M is not linked to the tenant account. So the financials are correct, but the tenant ledger is not. Is this what you’ve experienced?
Im tempted just to add a credit entry on the ledger just so it zeroes out…
Your observation is correct. I think I found the error in what I previosly wrote. Let me try one more time.
The Security Deposit refund is handled in two parts.
The first part is to move money out of the Security Deposit category and zeroing out the tenants balance. This is done by adding transactions, with the category set to Security Deposit, for damages and money refunded to the tenant. The sum of these transactions should be the total security deposit amount. Since transactions moving in and out of the Security Deposit category are treated as transfers, they do not show up in the income or operating expenses sections of the financial statements. After adding these transactions, you will see the Security Deposit category on the Income Statement and Balance Sheet reduced by the total security deposit amount. The balance on the tenant page will also be zero.
The second part is to bring the security deposit money not returned to the tenant into the company financials. Do this by creating one transaction representing the amount for all damages, non-refundable amounts, or other charges. Mark it as Money-In, the category set to Income>Rents, and the Property correctly. Set the Tenancy to No tenancy or No Unit. By doing this the transaction does not show up on the tenants page which would ruin their zero balance. The transactions will now show up as rental income on the Income Statement, Net Cash Flow statement and Schedule E (under the correct property). You could do separate transactions for each amount, if you like.
You will likely have a transaction representing the check written to the tenant for the refunded amount. Mark this as Money-out and set the Category to Transfers. This will cause it not show up on the financial statements but you will have a record of it in your transactions.
Transactions paid to contractors to repair damages will be normal and show up as normal expenses.
By following these steps, the tenant balance will be $0, only the part of the deposit brought into the company will show as income, and your financial statements should be correct.