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How to 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 are a landlord and receive a refundable deposit from one of your tenants, you should follow the steps below to explain the bank transaction and post journal entries to record the amount owed back to the tenant on your balance sheet. 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.

For information on how to explain a rent deposit paid to a landlord, please see this article.

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 will need to explain it using the appropriate ‘Type’ and ‘Category’ as detailed below.

Navigate to the ‘Banking’ tab at the top of the screen and select ‘Bank Accounts’ from the drop-down menu.

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Choose the relevant bank account from the list.

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Select the transaction that you would like to explain.

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If you have not raised a VAT invoice for this sum, select ‘Refund’ from the transaction ‘Type’ drop-down menu. If you have raised a VAT invoice, select ‘Invoice Receipt’ as the transaction ‘Type’ and follow the steps in this article (option 1) instead.

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Select ‘Exempt’ from the ‘Including [X] VAT’ drop-down menu.

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Select ‘Rent’ from the ‘Category’ drop-down menu.

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Select ‘Explain Transaction’ to complete the process.

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

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Posting journal entries to record the amount owed to the tenant on your balance sheet

After you’ve explained the bank transaction, you’ll need to post the following journal entries dated the same date as the bank transaction for the amount of the rent deposit excluding VAT:

  • Credit account ‘797 - Other Creditors’
  • Debit account ‘251- Rent’

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This will record the rent deposit on your balance sheet as money owed to the tenant.

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A record of journal entries being created will also appear in your Audit Trail report.

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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 explaining the money paid into your bank account by the tenant and posting the journal entries as detailed above, then create a dummy bank account and give it a clear name like ‘Tenancy Deposit Scheme’.

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Then, when the money is paid out of your business bank account into a Tenancy Deposit Scheme and the transaction has been imported into FreeAgent, explain it as a transfer to the Tenancy Deposit Scheme bank account.

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This will record the deposit paid to the Tenancy Deposit Scheme as an asset on your Balance Sheet, as your company will be due this money back from the Tenancy Deposit Scheme at the end of the tenancy. You’ll then pay this back to the tenant.

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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, explain the transaction as a transfer from the Tenancy Deposit Scheme bank account.

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This will bring the balance in the Tenancy Deposit Scheme bank account back to zero and remove the asset from your Balance Sheet.

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, you will need to explain it using the appropriate ‘Type’ and ‘Category’ as detailed below once the relevant bank transaction has been imported into your FreeAgent account.

Navigate to the relevant transaction and select ‘Other Money Out’ from the transaction ‘Type’ drop-down menu.

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Select ‘Payment to Other Creditor’ from the ‘Category’ drop-down menu.

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Select ‘Explain Transaction’ to complete the process.

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This will net off against the amount entered to account ‘797 - Other Creditors’ from the journal entries and remove the liability from your balance sheet.

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

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