A landlord asks for three months’ rent as a deposit. A utility supplier wants security before connecting a new site. A business lets equipment and holds a customer’s deposit until it comes back undamaged. In each case cash changes hands, but nothing has been bought or sold yet. Security deposits are therefore balance sheet items.
Deposits paid
Post deposits the business pays to a current or non-current asset account, depending on when they will come back:
| Account | Use |
|---|---|
| Rent deposits paid | deposits held by landlords, usually recoverable at the end of the lease (often more than a year away, so non-current) |
| Other deposits paid | utilities, equipment hire, customs or supplier guarantees |
A shop signs a five-year lease and pays a £12,000 rent deposit:
| Account | Debit | Credit |
|---|---|---|
| Rent deposits paid (non-current) | £12,000 | |
| Bank | £12,000 |
In the final year the deposit moves to current assets because it is due back within twelve months.
Deposits received
Deposits the business holds for customers or tenants are liabilities: the money belongs to someone else until the contract allows it to be kept.
| Account | Debit | Credit |
|---|---|---|
| Bank | £500 | |
| Customer deposits held | £500 |
Keep these separate from advance payments for goods or services, which are part of the price and will become revenue. A refundable security deposit is not part of the price; an advance payment is.
VAT
A genuinely refundable security deposit is outside the scope of VAT when it is taken, so no VAT invoice is needed. VAT can arise later: if the landlord keeps part of the deposit for unpaid rent, that part is rent (and carries VAT if the landlord has opted to tax); if it is kept to compensate for damage, it is generally compensation and outside the scope. Advance payments, by contrast, create a tax point when received.
When the deposit is not returned in full
At the end of a lease the landlord returns £12,000 less £1,500 for dilapidations repairs:
| Account | Debit | Credit |
|---|---|---|
| Bank | £10,500 | |
| Repairs and maintenance – premises (or dilapidations provision) | £1,500 | |
| Rent deposits paid | £12,000 |
If a dilapidations provision was set up during the lease, use it here rather than charging the profit and loss account again.
Keeping track
Rent deposits stay on the balance sheet for years and are easily forgotten when premises change. Keep a short register: who holds the deposit, the amount, the contract, the date it should come back and whether it is held in a protected deposit or rent deposit deed. Review it at every year end and chase deposits on contracts that have ended.
For dilapidations and other end-of-lease costs see rent and premises costs, and for prepayments to suppliers, which are different from deposits, supplier prepayments.