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.
The Steps
Step 1 - Create a Chart of Accounts Category for Interest Payable
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 > Other Current Liability account called Interest Payable.
Under Lease Options, turn on Use this account for Lease Charges.
Click Save to continue.
Step 2 - Record a Bank Deposit for Interest Earned on the Security Deposit Each Month
On the top left, click Create New, and under the 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 Liability > 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.
Step 3 - Post a Charge for Interest Earned on the Lease
Next up, we want to record the interest earned on the lease. Click on Leasing on the main menu and then click Active Leases. Click on the lease that we will add interest to.
On the lease overview page, click the Transaction tab and then click Post Charge.
On the Post Charge window, select the Liability > Security Deposit category and enter the amount of interest earned.
Click Save to complete.
Step 4 - Issue a Credit for Interest Earned on a Lease
You now need to issue a credit on the lease to offset the new charge. On the same Transactions tab, click Issue Credit. (We issue a credit because we have already recorded the Interest Payable as a Bank Deposit.)
On the Issue Credit window, enter the following:
Category - choose Liability > Interest Payable as the offsetting account.
Amount - Enter the Amount of the interest earned for that lease. (The amount of the credit should equal your total when you posted a charge for the interest earned.)
Click Save to finish.
Step 5 - View Interest Earned on a Lease
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. You will see a line item for each month that Interest Earned was added to the lease.
Refund the Security Deposit, Including the Interest Earned
At the end of the lease, when it's time to refund the security deposit along with the interest earned, this can easily be done if you have been keeping up with the recording of interest earned.
When on the lease, click the Deposits tab. In the Security Deposit section, the Total Security Deposit line is the total of the Security Deposit originally received and the amount of interest earned. If you haven't withheld any of the deposits, this is the amount you would refund back to the tenant. Follow these instructions if you need a refresher on how to refund a deposit: Refund a Lease Deposit on an Active Lease.