Managing security deposits in Canada involves more than just holding funds; in many provinces (such as Ontario, British Columbia, and Manitoba), landlords are legally required to pay tenants interest on those deposits.
The Deposit Interest Adjustment Task is designed to automate this complex accounting process, ensuring your books stay compliant with provincial regulations while accurately distributing bank interest.
What is the Deposit Interest Adjustment Task?
This task ensures that the interest your bank pays you on your security deposit account is correctly distributed. Instead of a simple "pro-rata" split, the system calculates exactly what is owed to each tenant based on the legal interest rates of your region and the anniversary date of their deposit.
How It Works: Step-by-Step
1. The Anniversary Accrual
Interest isn't just paid out randomly. In accordance with provincial laws, interest is typically owed on the anniversary of the lease (the date the deposit has been held for a full year).
When a lease reaches its anniversary, the system automatically generates an "Interest Expense" for that property. This tells the system: "This property now owes the tenant $X in interest."
2. Matching Revenue to Expenses
When you run the Deposit Interest Adjustment Task (usually done before your monthly bank reconciliation), the system looks at two main things:
Interest Revenue: The actual interest paid into your security deposit account by the bank.
Interest Expense: The legal interest owed to tenants based on their lease anniversaries.
The task creates an entry to ensure these two match up perfectly.
3. Distributing the "Admin" Surplus
In many cases, the interest your bank pays you might be slightly higher than the minimum legal interest you owe your tenants.
The Tenant’s Share: The system first allocates the exact legal amount to the tenant's deposit liability.
The Admin Share: Any "leftover" interest remaining in the security deposit account after the tenants have been paid is moved to your Admin Property as revenue for the property management company.
The Accounting "Behind the Scenes"
For those who want to see the "why" behind the numbers, here is how the system moves the money to keep your General Ledger (GL) balanced:
Action | Account Affected | Debit/Credit |
On Anniversary | Interest Expense | Debit (Increases expense) |
| Deposit Liability | Credit (Increases what you owe tenant) |
Running the Task | Interest Revenue | Debit (Clears the bank revenue) |
| Admin Revenue | Credit (Moves surplus to your company) |
Why Use This Task?
Legal Compliance: Automatically follows provincial interest rate requirements so you don't have to calculate them manually.
Audit-Ready Books: Ensures that your Security Deposit Bank Account matches your Deposit Liability exactly.
Automated Revenue: Seamlessly captures surplus interest as administrative profit without manual journal entries.
Pro Tip: We recommend running this task every month immediately before you start your Bank Reconciliation. This ensures your bank balance and your ledger are in perfect sync.
To ensure that your lease records match what was received for security and other refundable deposits, use the refundable deposit report for the property to ensure that it matches the balance in the security deposit trust account. This information is taken from the lease record and should be used as a sub-ledger when doing a trust reconciliation. The report will break out the amounts that are
Outstanding
Collected
Retained for damages
Returned to the tenant
Interest expense accrued (interest is accrued on the lease's anniversary)
Collecting Deposits
When a security deposit (or other refundable deposit type) receivable is deposited in accounting the deposit will be automatically categorized as Collected as of the deposit date. If you need to manually change the deposit to collected you can do so by
Navigating to the lease and click on Manage Deposits
Select Collected
Click on Next: History
Update the date that the deposit was collected
Click on Update Refundable Deposits
Recording Interest Earned
Each month the interest earned by holing security deposits should be recorded. The Deposit Interest Adjustment batch, under Accounting Tasks, will allocate a portion of the interest earned to any properties that have had accrued deposit interest for the fiscal year. The balance of the interest is added to the admin property. This will ensure that the interest earned and the interest expense will match for each property.
Navigating to Accounting - Tasks click on Deposit Interest Adjustment
Select the bank group where interest has been earned
Enter the date the interest was earned
Enter the total interest amount earned and click Create
Review the amounts allocated to each property and click Post
Issuing Deposits
Deposits can be returned to the tenant, retained for damages or retained for rent collection from Issue Deposit.
If you need to manually change the deposit to returned you can do so by
Navigating to the lease and click on Manage Deposits
Select Returned
Click on Next: History
Update the date that the deposit was returned
Click on Update Refundable Deposits
Reconciliation
You should also do an account reconciliation for the security deposit trust account to the appropriate bank statements. Following these recommendations will provide you with 3 sources that should all correspond and match - refundable deposit report, security deposit trust account, and the bank statement.