Overview
Depending on what state you are in and your local regulations, security deposits may need to be kept in an interest-bearing account. The interest earned normally needs to be paid out to the tenants. To ensure compliance, it's advisable to verify with the local real estate commission or licensing entity if you're unsure about the specific guidelines that apply in your area.
Adding interest on a security deposit to a lease ledger
In this scenario, security deposit interest needs to be paid to tenants and the cash is kept in an interest-bearing bank account. The total liability grows over time as interest is added.
From the main menu, click Accounting and then click Chart of Accounts.
On the top right, click New Account and create a liability sub-account called Interest Payable under Security Deposit.
Under Lease Options, turn on Use this account for Lease Charges.
Click Save to continue.
On the top left, click Create New and under Other Transactions section, click Bank Deposit.
Deposit Account: Select the bank where security deposits are held
Property: Choose the property where the interest was earned
Account: Select Interest Payable
Description: (Optional)
Amount: Enter the amount of interest earned
Payment Method: (Optional)
Reference: (Optional)
Received From: (Optional)
Repeat this if you need to enter interest for other properties.
Next up, we want to record the Interest on the lease. On the main menu, click on Leasing and then click Active Leases. Click on the lease that will have interest added to it.
On the lease overview page, click the Transaction tab and then click Post Charge.
Post a charge to the Security Deposit > Liability account and enter the amount of Interest earned.
Click Save to complete.
Next, you'll need to issue a credit on the lease to offset the new charge. On the same Transactions tab, click Issue Credit.
For the Account, choose Interest Payable > Liability as the offsetting account.
Enter the Amount of the interest for that lease.
The amount of the credit should equal your total when you posted a charge for the interest.
Click Save to finish.
When you're done, double-check to make sure that everything has been entered correctly:
The total outstanding balance on the lease ledger should be unchanged to what it was before. For example, the tenant was caught up and owed nothing, then that should still be the case.
The total security deposit liability should have increased by the interest amount. For example, if you held $1000 in security deposit before the interest and you added $1 in interest, the total security deposit should now be $1001.