The tenants' security deposit is recorded as what in the closing entries?

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Study for the Burk Baker National Test. Use flashcards and multiple choice questions with hints and explanations to prepare effectively. Get ready for your exam!

Multiple Choice

The tenants' security deposit is recorded as what in the closing entries?

Explanation:
Security deposits are a liability for the landlord, because they are amounts tenants have paid that may be returned. When the property selling closes, that obligation shifts from the seller to the buyer. In the closing entries you reflect this by decreasing the seller’s liability and recognizing the same liability on the buyer’s books. Practically, that means a debit to the seller (to reduce the seller’s security-deposits payable) and a credit to the buyer (to establish the buyer’s security-deposits payable). The net effect is the liability transfers from seller to buyer, which is why the correct treatment shows a credit to the buyer and a debit to the seller.

Security deposits are a liability for the landlord, because they are amounts tenants have paid that may be returned. When the property selling closes, that obligation shifts from the seller to the buyer. In the closing entries you reflect this by decreasing the seller’s liability and recognizing the same liability on the buyer’s books. Practically, that means a debit to the seller (to reduce the seller’s security-deposits payable) and a credit to the buyer (to establish the buyer’s security-deposits payable). The net effect is the liability transfers from seller to buyer, which is why the correct treatment shows a credit to the buyer and a debit to the seller.

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