Tenant Security Deposits Accounting Treatment

Hi Reese

Formerly, tenant deposits are treated as income when they 
are received and expenses incurred when contract is terminated are
recognized in the month contract is terminated which may be far

The effect is income is overstated in the contract start and expenses
are overstated in the month contract is terminated. No liability is shown
for the amount of the deposit which is the real nature of the tenant 

So NOW, tenant deposit is recognized as liability. The liability is
recognized for the life of the rental contract. It is discharged when 
the contract is terminated. Any amount incurred as expense in excess of 
the liability is Bad Debts. 

Journal Entry:
(1)Cash                                                                              XX.xx
            Rental Income                                                                            XX.xx
            Liability-Name of tenant-Deposit                                           XX.xx
                   to record start of contract, receipt of deposit and advance rent

(2)Liability-Name of tenant-Deposit                             XX.xx
             Accounts Receivable-Name of Tenant                                   XX.xx
             Bad Debts (if any)                                                                     XX.xx
                    to record termination of contract,closing of tenant account

Adjusting entries were made to correct affected accounts. 
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