This blog entry is for my property managers out there or anyone else that receives deposits or prepayments from customers before the service/product is done. For example, when a vacation rental is booked through a website like VRBO, a property management company should not be booking that as income on the Profit & Loss. It is actually a liability. Here’s why:
These funds are considered a liability (Balance Sheet item) because while funds have been received, it is for a service that has not yet been performed and the income is considered “unearned”.
Why Do I Need To Record Deposits or Prepayments On The Balance Sheet Instead of Directly to the Profit & Loss?
This is a good question. It seems faster and easier to just book deposits to your income account. The problem with this is when you have expenses related to this income during a different financial period (month and/or year). Let me give you an example:
You are a property manager that has received a deposit for a rental property. You received the deposit in November 2014 but the rental doesn’t occur until March 2015. When it comes time to pay the property owner his income, following the actual rental, you will have no income in 2015 for this property, but you will have a large expense (the owner’s payment). So, 2014 looked like a great year because you had income and no expense. 2015 looked horrible because you had no income and a large expense.
So in essence, you are shelving the deposit until it is ready to be used/earned. The correct way to shelve these deposits is on the balance sheet as an account called something like Prepaid Rental Income, Deposits, Rents in Trust, etc. The important part is to make sure they are considered a Current Liability.
Here is a step-by-step to processing receivables with deposits that you might find helpful:
Using QuickBooks Online in this scenario, this property management company receives 2 deposits for vacation rentals, one at the time of booking and one 60 days before the rental takes place.
Received Deposit for Rental
*This step records funds coming into the bank account but properly held on the balance sheet as a liability until these funds are considered Earned Income
1st Deposit Received:
1) Record invoice with correct “Property” selected
2) Make Due Date the date 2nd payment is due (60 days before rental).
2nd Payment received:
*This step records funds coming into the bank account but properly held on the balance sheet as a liability until these funds are considered Earned Income
1) Go back to original invoice and show invoice has been paid in full.
Steps after Rental is Complete
Rental Term Completed (earn income and move owner $$$)
1) Hit the + Button
2) Other > Journal Entry
a. Make sure Journal Date is the date in which the income from the rental is earned (day after rental period is complete)
b. Journal no. should be JE[invoice number], for example JE5406.
c. Make sure box is Unchecked for Adjusting Journal Entry
3) The Journal Entry should be as follows:
Account Debits Credits Description Property
Prepaid Income XX Invoice # Property Location
Rental Income XX Invoice # Property Location
Owner Payments XX Invoice # Property Location
*The Prepaid Income dollar amount should be the total rental invoice amount, which should also be Rental Income amount + Owner Payments amount. Both the Debits and Credits columns need to be the same dollar amount before saving and closing.
**Make sure the Property is the same for all three lines.
Pay the Owner:
*This pays the owner out of your PPS WF Checking account and lowers the Owners Payment liability on the Balance Sheet.
On the 20th of the following month or when you are ready to pay the owner, follow these steps:
1) Hit the + Button
2) Other > Journal Entry
a. Make sure Journal Date is the date in which the income from the rental is earned (day after rental period is complete)
b. Journal no. should be JEOP[invoice number], for example JEOP5406.
3) The Journal Entry should be as follows:
Account Debits Credits Description Property
Owner Payments XX Pay (owner name) for Inv 5406 Prop. Loc.
PPS WF Bank Account XX Pay (owner name) for Inv 5406 Prop. Loc.