Explain a rent deposit received from a tenant

This article describes how to explain a refundable deposit paid into your bank account from a tenant for rent. It also describes how to explain the money paid out of your bank account when the deposit is refunded to the tenant.

If you have an unincorporated landlord account, find out how to explain a refundable deposit received from a tenant instead.

If you are a landlord and receive a refundable deposit from one of your tenants, follow the steps below to add a new liability category for the deposit and then explain the bank transaction. You may also need to pay the tenant’s deposit into a Tenancy Deposit Scheme.

Please note that you’ll need full (level 8) access to your FreeAgent account to follow the steps below.

If you're a tenant, find out how to explain a rent deposit paid to a landlord.

1. Add a new liability category

First, add a new liability category in FreeAgent by selecting 'Settings' from the drop-down menu in the top-right corner of the screen and then selecting 'Accounting Categories'.

Select ‘Liabilities category’ from the ‘Add New’ drop-down menu.

Enter a name for the category in the ‘Description’ field and choose a new nominal code number for it.

Please note that FreeAgent will only let you pick certain codes - for example, ‘Liability’ categories can only range from ‘731’ to ‘780’ - and some of the codes will already be taken by FreeAgent's existing categories.

Choose where the category should be reported on your Final Accounts report from the ‘Reporting Type’ drop-down menu. If you’re unsure which category to select, please ask your accountant.

Once you’ve chosen a nominal code, select ‘Create Category’ to save this new category.

2. Explaining the money paid into your bank account

Once the relevant bank transaction has been imported into your FreeAgent account via a bank feed or uploaded from a bank statement, you'll need to explain it using the appropriate ‘Type’ and ‘Category’.

To do this, navigate to the ‘Banking’ tab at the top of the screen, select ‘Bank Accounts’ from the drop-down menu and choose the relevant bank account from the list.

Select the transaction that you'd like to explain.

Select ‘Other Money In’ as the transaction ‘Type’ and choose the liability category you created from the ‘Category’ drop-down menu.

Select ‘Explain Transaction’ to complete the process.

A record of the bank transaction being explained will appear in your Audit Trail report.

3. Paying the deposit into a Tenancy Deposit Scheme

You may need to pay the tenant’s deposit into a Tenancy Deposit Scheme, which will hold the money for the duration of the tenancy. For more information on this process, please see HMRC’s guidance. If you’re unsure whether this applies to you, please ask your accountant or HMRC.

To handle the deposit payment into a Tenancy Deposit Scheme in FreeAgent, begin by adding a new liability category and giving it a clear name like ‘Tenancy Deposit Scheme’.

Then, when the money is paid out of your business bank account into the Tenancy Deposit Scheme and the transaction has been imported into FreeAgent, select ‘Other Money Out’ as the transaction ‘Type’ and choose the liability category you created from the ‘Category’ drop-down menu.

When the money is paid back into your business bank account from the Tenancy Deposit Scheme at the end of the tenancy and the transaction has been imported into FreeAgent, Select ‘Other Money In’ as the transaction ‘Type’ and choose the liability category you created from the ‘Category’ drop-down menu.

Select 'Explain Transaction' to complete the process.

4. Explaining the money paid out of your bank account

When you pay the money back to the tenant at the end of the tenancy agreement and the relevant bank transaction has been imported into your FreeAgent account, you will need to explain it using the appropriate ‘Type’ and ‘Category’.

To do this, navigate to the relevant transaction, select ‘Other Money Out’ as the transaction ‘Type’ and select the liability category you created from the ‘Category’ drop-down menu.

Select ‘Explain Transaction’ to complete the process.

A record of the bank transaction being explained will also appear in your Audit Trail report.