The accounting for short term deposits depends on if you have received/paid the deposit. So, there can be two situations.
You have paid the deposits.
If you have paid the deposit, it’s converted to an asset because it will be received at the end of the commitment. For instance, you might get equipment on a one-year lease by paying a deposit amounting to $5,000. It can be accounted for as follows.
| Particulars | Debit | Credit |
| Short term deposit (current asset) | 5,000 | |
| Cash | 5,000 |
The debit impact of this transaction is recording the deposit. It’s like a receivable at the end of the commitment term. On the other hand, credit impact is recording payments for cash.
At the end of the commitment, you will receive back the cash against deposits. In this case, it will be recorded as follows.
| Particulars | Debit | Credit |
| Cash | 5,000 | |
| Short term deposit (current asset) | 5,000 |
The debit impact of this transaction is recording for the cash as it has been received back. On the other hand, credit impact is the removal of a deposit as it has been realized as a cash receipt.
The second scenario is when you’ve received the deposit.
You have received the deposits
If you’ve received the deposit, it will be converted into a liability because you have received the cash that is payable after a certain time. At the time of receiving the cash, the following journal entry is posted in the accounting books.
| Particulars | Debit | Credit |
| Cash | XXX | |
| Short term deposit (current liability) | XXX |
The debit impact of this transaction is recording for the cash receipt. On the other hand, the credit impact is recording for the short term deposit, it’s because this balance needs to be settled in the future. Hence, it’s a liability.
So, at the end of the commitment, you’ll need to pay back the short term deposits which need to be recorded in the following journal entry.
| Particulars | Debit | Credit |
| Short term deposit (current liability) | XXX | |
| Cash | XXX |
The debit impact of this transaction is the removal of the deposits from books as it has been settled by paying back. On the other hand, the credit impact of this transaction is recording for the cash as it has been paid.
Also read, accounting for long term deposit.
Conclusion
There are two possible scenarios when we account for deposits. The first option is that you have paid the deposit. In this situation, cash is credited and the deposit is debited. It’s the same as receivables. On the other hand, if you have received the deposit, it’s recorded as a liability. And the settlement of the liability results in an outflow of economic benefits.
