A long term deposit is when you pay/receive deposit for a time of more than twelve months. The accounting treatment for the long term deposit depends on the fact that if you have paid/received the deposit. Let’s understand accounting treatment in both cases.
Accounting treatment for long term deposit when you pay the deposit to some vendor/owner
Suppose you pay a long term deposit for getting office space on rent. The deposit amounts to $4,000 and you will receive it back at the end of the rental contract. The accounting entries at the time of paying the deposit will be as follow.
Description | Debit | Credit |
Deposit (asset) | 4,000 | |
Cash | 4,000 |
The debit impact of the transaction is a recording of the deposit as an asset in the financial statement. It’s because you’ll get this amount back in the coming time. So, it’s a type of receivable. On the other hand, credit impact is recording payment of the cash as we have paid in actual.
Once, the rental period is completed and you receive back the cash (deposit), the following entry is posted in the books.
Description | Debit | Credit |
Cash | 4,000 | |
Deposit (asset) | 4,000 |
The debit impact of the transaction is the recording of the cash as it has been received at the end of an accounting period. On the other hand, the credit impact is the removal of the deposit (asset) from the financial statement.
However, if you have received a deposit from some tenant/customer, the accounting treatment will be as follow.
Also read, elements of financial statement.
Accounting treatment for long term deposit when you receive the deposit from some tenant/customer
Suppose you have received a long term deposit from any tenant. The deposit is payable at the end of the rental contract. So, it’s a liability and you need to pay it back. In this case, the following journal entry will be posted in the books of accounts.
Description | Debit | Credit |
Cash | 4,000 | |
Deposit (liability) | 4,000 |
The debit impact of this entry is the recording of the cash as you have received the cash from the tenant. On the other hand, the credit impact is the recording of the liability as you have entered in an obligation to pay the liability.
So, at the end of a contract, when you pay back a deposit, the following journal entry is posted in the books.
Description | Debit | Credit |
Deposit (liability) | 4,000 | |
Cash | 4,000 |
The debit impact of the transaction is the removal of the liability from books as you have satisfied your obligation to pay. On the other hand, the credit impact of this transaction is the recording of the cash you have paid in actual.
Conclusion
A long term deposit is recorded as an asset when you have paid it to someone. The balance remains receivable in the books. However, once it is received, the deposit (asset) is credited to the books. On the other hand, if you have received a deposit, it’s a liability as you need to pay it back in the future. However, once you have to pay the liability, it’s removed from the books of accounts.