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Record Security Deposit Interest Earned on a Lease

Record interest earned on a security deposit held in an interest-bearing account, and pay it out to the tenant when required by law.

Written by Samuel

Overview

Depending on your state and local regulations, security deposits may need to be kept in an interest-bearing account, with the interest paid out to the tenant. To ensure compliance, verify with your 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.

  1. To create an interest payable account, click Accounting > Chart of Accounts on the main menu.

  2. On the top right, click New Account.

  3. On the New Account window, create a Liability > Other Current Liability account called Interest Payable.

  4. On the Lease Options tab, turn on Use this account for Lease Charges.

  5. Click Save to continue.

Step 2: Record a Bank Deposit for Interest Earned on the Security Deposit Each Month

Click Create New on the top of the main menu. Then under the Transactions section, click Bank Deposit.

On the Bank Deposit window, enter the following information:

  • 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

  1. Next, post a charge for the interest earned. Click on Leasing > Leases on the main menu.

  2. Find and click on the lease you need to post the charge on.

  3. On the lease, click the Transaction tab and then click Post Charge.

  4. On the Post Charge window, select the Liability > Security Deposit category and enter the amount of interest earned. You can also add a Description that this is for Interest Earned.

  5. Click Save to complete.

Step 4: Issue a Credit for Interest Earned on a Lease

  1. On the same Transactions tab, click Issue Credit to offset the new charge. This offsets the charge since the interest was already recorded as a bank deposit in Step 2.

  2. On the Issue Credit window, enter the following:

    • Category: Choose Liability > Interest Payable as the offsetting account.

    • Amount: Enter the amount of interest earned for that lease. (This should match the amount you used when posting the charge in Step 3.)

    • Description: (Optional)

  3. Click Save to finish.

Step 5: View Interest Earned on a Lease

Double-check that everything was entered correctly:

  • The total outstanding balance on the lease ledger should be unchanged from before. For example, if the tenant was caught up and owed nothing, that should still be the case.

  • The total security deposit liability should have increased by the interest amount. For example, if you held $1,000 in security deposit and added $1 in interest, the total should now be $1,001. You'll see a line item for each month interest was added to the lease. [Screenshot: Lease Deposits tab showing monthly interest line items]

Refund the Security Deposit, Including the Interest Earned at the End of the Lease

At the end of the lease, refunding the security deposit along with the interest earned is straightforward if you've been keeping up with recording interest each month.

On the lease, click the Deposits tab. In the Security Deposit section, the Total Security Deposit line shows the total of the original deposit plus the interest earned. If you haven't withheld any of the deposit, this is the amount you'd refund to the tenant. See Refund a Deposit Held on a Lease for a refresher on how to refund a deposit.

Disclaimer

The information provided is not offered by a licensed accountant and is intended for general informational purposes only. It is crucial to verify local accounting laws and regulations independently, as they vary. This information should not be considered a substitute for professional advice. For accurate guidance, consult a licensed accountant familiar with your jurisdiction's specific requirements. The author and publisher are not liable for any damages or losses resulting from reliance on this information.

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