Record Security Deposit / Funds in Escrow

shanegshaneg Member Posts: 1

Landlord here looking for the appropriate way to records security deposits that are held in escrow.

According to accounting standard the receipt of a security deposit should increase a cash asset account (no impact on income) and increase a liability account. When this transaction imports from my bank I do not have the option to categorize it as a liability. One thought I had was to enter journal transactions for this, however, in the chart of accounts Wave only lets you add new liabilities accounts under a category of debt and this is not debt.

Any thoughts on how to record this?

Comments

  • Abbas AliAbbas Ali Administrator Posts: 11 admin

    Hi,

    Creating Escrow Account:
    As Wave doesn't have a specific function for this type of bookkeeping, we can currently suggest that you can record the escrow amount under current liability section, selecting other current debt.
    Next create an escrow income amount in the income section for categorization purpose. ( create a product or service from the escrow-incomeaccount)

    Record Escrow Income
    Once you have imported the bank transactions in Wave. Record the income in liability account (Escrow) and categorize it as Escrow income.
    If you want to adjust the escrow income, you can select product or service (created under escrow-income account) on the invoice and deduct it from the total amount.

  • KenjKenj Member Posts: 27

    Hi, I still don't quite get it.
    This will be multiple escrow accounts per each tenant created in current liability?

    • Product/Service charged under Escrow-Income account - how would this then reconcile with the escrow account (which would have been reduced each time?)

    Thanks!

  • Abbas AliAbbas Ali Administrator Posts: 11 admin

    Hi

    Create a category in Chart of Accounts under Liability section called : Security Deposits. When your transaction is uploaded in Wave you just need to categorize it to Security Deposit. You do not need to create an escrow account for it. This method will show a liability owing in your balance sheet.

    Thanks

  • GoAltGoAlt Member Posts: 1

    How do you refund security/damage deposits if placed in current liability section?

  • AlexiaAlexia Administrator Posts: 3,315 admin

    Hi, @GoAlt.

    In this scenario, where the deposit was set in an escrow account, you would simply create an expense to that same liability account.

    If it isn't an escrow account and you are refunding that deposit out of pocket, you would create an expense account from your bank account, categorized to that liability account.

  • AustinLawAustinLaw Member Posts: 1

    I think it would be easier if there were a way for us to add a category for escrow so that the money is counted but it isn't counted as ours. Before switching from quickbooks, I found a way to label money "escrow" and have it disappear from my balance sheet. I could keep track of the money, but not have to cancel out every transaction.

  • TamogenTamogen Member Posts: 4

    Hi. Abbas Ali wrote "Create a category in Chart of Accounts under Liability section called : Security Deposits." I tried to do this. I went to chart of accounts and attempted to add an account. Under "Liabilities & Credit Cards." I have to select a subcategory. What subcategory should I select? Can someone provide a (much) more detailed answer? I need to record my security deposits (by individual property), and then I need to account for expenses that I deduct from the security deposit and I need to record the return of the security deposit to the tenant. Please explain how each of these will be recorded. Thanks.

  • PaulCPaulC Administrator Posts: 77 admin

    Hi @Tamogen,
    Thanks for your message.
    I'm concerned that we do not give you incorrect advice, and to that end I really think you should be discussing with your accountant the most appropriate way to be recording these transactions. Note that treatment of "Security Deposits" is different in different countries, with a general presumption that a security deposit is not part of the balance sheet of your business, but something held independently for your tenant. You don't mention what country you are operating in, which makes it particularly hard to comment. For example in some markets, you will be required to hold deposits in a formal escrow scheme; in others, not.
    When you talk to your accountant, please find out:
    1. How should you receive a rental deposit? Can it ever lawfully be deposited into your bank account?
    2. If first received into your bank account, can these monies be used in the operation of your business, or must they be transferred to a segregated account for the benefit of your tenant(s)? Within what timescale?
    3. If the rental deposit may be co-mingled with your business finances, what Liability account should you create to represent your obligation to repay the tenant at a future date?
    4. If the rental deposit must be segregated, how should the deposit account be represented? (One option could be to create a separate Wave "Business" for your rental deposits, to keep this out of your general business finances/balance sheet.)
    5. Is it lawful to deduct 'expenses' from the rental deposit prior to completion of the tenancy in your jurisdiction?
    6. If you can deduct 'expenses', what are the accounting steps? I'm guessing you'd need to recognize the amount deducted from the deposit as income, and match it to a balancing expense, but please get the specific steps.
    Once you have the detailed accounting process clear, by all means come back to us if you have any problems with the specifics of how to set any asset/liability accounts that your accountant recommends, or posting any journals.

  • TamogenTamogen Member Posts: 4

    Hi @PaulC,
    Thanks for the response. I am in Washington State, USA. I am NOT asking for legal or accounting advice--just advice on how to use the Wave software. I am just looking for technical advice on how to set up the transactions. I keep the security deposits in a separate account and I do not use them for operations but I do deduct expenses that are charged against the tenants' security deposit. I just want to make sure I have a way to do that in Wave. So the answers are:
    1. Yes, it can be deposited into my bank (but I do not commingle with my funds)
    2. Separate account
    3. Separate account
    4. I have not created a separate business, just a separate account
    5. Yes, I deduct for damages caused by the tenant above "fair wear and tear"
    6. That makes sense. Count it as income which is balanced with a matching expense.
    I can do that.
    What I really need to know is how to account for the deposit while I hold it. It not my money, but rather held in escrow for the tenant. Any advice you can give on that is greatly appreciated.

  • PaulCPaulC Administrator Posts: 77 admin

    Hi @Tamogen,
    Thanks for the additional detail. In this case, I'd suggest the following:
    1. If you don't already have it, create a new Asset Account (Type: Cash/Bank) in your Chart of Accounts to represent "Tenant Deposits Segregated Funds".
    2. Now in your Chart of Account, go to the Liabilities tab and create a new Liability Account in the "Customer Prepayments and Customer Credits" section. Call this something like "Refundable Tenant Security Deposits". Note that you can, if you choose, create a liability account in this category for each individual tenant, or you could aggregate the balance in one account and keep a separate spreadsheet record of what is due to each tenant.
    3. When you receive a Tenant Deposit, record it as an 'income' transaction in your Tenant Deposits Segregated Funds account. Categorize it to Refundable Tenant Security Deposits. You now have an offsetting Asset (funds in the bank) and Liability (obligation to refund tenant).
    4. In the event that you charge a tenant for repairs, I would recommend you create an invoice to the tenant, detailing the repair. Mark the invoice paid by adding a payment: make the Payment Method 'Other', and select the Payment Account to be Refundable Tenant Security Deposits - i.e. the liability account. (Obviously, if you run a liability account per tenant, pick the correct tenant.) This action will mark the invoice paid, and record the payment as income to your business; it will reduce the balance refundable to the tenant(s). The sum in your Tenant Deposits Segregated Funds account will not change.
    5. Record the actual repair cost as an Expense to your business, and pay it from the Tenant Deposits Segregated Funds Account (or transfer a proportionate amount from that account to whichever account you actually use to make payment.
    The above steps should keep all your Tenant monies and obligations clearly identifiable, distinguishing them from the operational finance of your business. Also, by invoicing each charge to the tenant's security deposit, you should have a decent paper trail when checking out the tenant and returning the residual deposit amount.
    Oh - and returning the deposit is simply a matter of cutting a check from the Tenant Deposit Segregated Funds account, and again categorizing this to the Refundable Tenant Security Deposits liability account,
    Hope that all makes sense. Again, please note this advice strictly relates to a workable method to track these financial transactions in Wave - you have made your own determination whether this is compliant with whatever deposit holding regulations exist where you operate.

  • JaysonWonderJaysonWonder Member Posts: 15

    Excellent guide here. Thanks for sharing!

  • TamogenTamogen Member Posts: 4

    Hi @PaulC. Thanks for that detailed response! I am working my way through this with your assistance. The problem I have encountered is that I now cannot reconcile my account. I created the new account "Tenant Deposits Segregated Funds xxx," where xxx is the address. The money is held in a savings account. In addition to the security deposits for the houses, there is also a small amount of interest which, by law, I can keep. The problem is now the security deposits no longer show up under the savings account because they are in the new account. If I try to reconcile the savings account, there is a discrepancy. Am I doing something wrong or is this just something I will have to deal with? Thanks.

  • PaulCPaulC Administrator Posts: 77 admin

    Hi @Tamogen,
    Sounds like you are close to a solution!
    At Step 1 in my suggested setup, it sounds like you are creating an asset account per tenant. I thin that is overkill. While it can be a good idea to create a liability account per tenant - so that you precisely track what you owe to each - it is better if the asset account side tracks where the money physically is. So, unless you have a client account that actually tracks as a separate account per tenant, just keep one account for 'Tenant Deposit Segregated Funds' (i.e. segregated from your business' general monies; not necessarily from one another).
    This account can be called whatever you like - I was just trying to clarify its purpose with a 'formal-sounding' name. It sounds like you are using a separate savings account to hold client deposits, so that is the asset account in your setup.
    Interest received in the savings account should be recorded as 'other income', and can be withdrawn from time to time as you please. Really, you just want to check periodically that you are retaining balance, i.e. add up all your Refundable Tenant Security Deposit accounts, and make sure they equal what you have in Savings.
    Hope that's clearer.
    Cheers, Paul

  • TamogenTamogen Member Posts: 4
    Thanks @PaulC. I think I’ve almost got it. If I understand correctly, I can get rid of my asset accounts for each tenant and just use the savings account that I hold the deposits in. I download my transactions into wave from that account already. My liability accounts per tenant are good. Now I should be able to reconcile the savings account with me statement normally. Have I got that right? Thanks!
  • PaulCPaulC Administrator Posts: 77 admin

    Sounds like you're there, @Tamogen! :)
    Glad I was able to help, and thanks for sharing an interesting scenario, that may also help other members of the Community to read about.

  • HeadroomHeadroom Member Posts: 7

    Deleted comment

    edited March 2, 2019
  • HeadroomHeadroom Member Posts: 7

    Deleted comment

    edited March 2, 2019
  • RajRaj Member Posts: 1

    Hey Guys,
    I have similar question. I'm managing a rental property which has impound account. Taxes and insurance are paid out through the Loan. I'm using prepaid expenses as a account under asset. Whenever I make a payment to mortgage company, I'm splitting the transaction into 3 category.
    Prepaid expense
    Interest expense
    Principle - Loan liability account

    Do I need to do a journal when the mortagage company actually disburses the money to insurance and property tax ? If so what should be the journal entry ?

    edited May 14, 2019
  • JamieDJamieD Administrator Posts: 993 admin

    @Raj My assumption is yes, that you would need to create a journal entry for this.. but I can't advise on exactly how that would look. My suggestion is that you seek the advice of an accountant in this situation, or perhaps @Mikeg might be able to provide you with a bit of insight on how to best handle this type of transaction in Wave.

  • MikegMikeg Member Posts: 359 ✭✭✭
    Raj,
    Yes, when the mortgage company makes the actual disbursement you would do a journal entry as follows:
    Debit - real estate tax expense
    Debit - insurance expense
    Credit - prepaid expense.
    Usually that account is called Escrow.
    The reason being is that it represents cash held. If you sold the property some of that would get refunded. While a prepaid expense represents cash paid in advance for an expense. Hope that makes sense.
    Mike G, CPA
    www.mgfinancial.net
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