How to Record a Deposit That Is Not Income

Accurate financial record-keeping requires properly classifying all money received. Not every deposit into a business bank account represents income for accounting or tax purposes. Incorrectly categorizing non-income deposits can lead to misstated financial statements and potential tax compliance issues, impacting a business’s operational performance and financial health.

Identifying Deposits That Are Not Income

Recognizing deposits that do not qualify as revenue is the first step toward accurate financial recording. Loan proceeds, for instance, are funds borrowed from a lender that must be repaid, making them a liability rather than income. Owner contributions or investments represent funds an owner personally injects into the business, increasing their equity stake, not business revenue.

Refunds received for overpaid expenses or returned purchases are another common non-income deposit. These amounts simply reduce a previously recorded expense or asset cost.

Security deposits collected, such as by landlords, are funds held in trust for a tenant and are generally refundable; they represent a liability until conditions for retention are met. Funds transferred between a business’s own internal bank accounts, like moving money from savings to checking, are merely asset transfers and do not generate income.

Core Accounting Principles for Non-Income Deposits

Understanding foundational accounting principles is essential for correctly recording non-income deposits. Double-entry accounting mandates that every financial transaction impacts at least two accounts, with total debits always equaling total credits. This system ensures the accounting equation—Assets equal Liabilities plus Equity—remains balanced after every transaction.

Financial accounts are broadly categorized into income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and equity). Non-income deposits primarily affect balance sheet accounts.

Cash or Bank accounts, which increase when deposits are made, are classified as assets. Loans Payable accounts, reflecting money owed to lenders, are liabilities. Owner’s Equity or Capital accounts signify the owner’s investment in the business and are a component of equity. Customer Deposits or Security Deposit Liability accounts are liabilities, representing obligations to return funds received from customers or tenants. These balance sheet accounts properly classify funds that do not represent earned revenue.

Recording Different Types of Non-Income Deposits

Recording non-income deposits accurately involves specific journal entries:

• When a business receives loan proceeds, the Cash or Bank account (an asset) is debited, and a Loans Payable account (a liability) is credited. This acknowledges the obligation to repay borrowed funds without impacting income.
• Owner contributions increase assets and equity. When an owner invests personal funds, the Cash or Bank account is debited, increasing the business’s cash assets. An Owner’s Equity or Capital account is then credited, which increases the owner’s stake. This transaction impacts the balance sheet by increasing both assets and equity, reflecting the owner’s investment.
• For expense refunds, such as for an overpayment or returned item, the Cash or Bank account is debited to reflect the cash inflow. The original expense account is then credited. This reduces the expense, rather than creating new income, adjusting the net cost of the original transaction. For example, a refund for office supplies credits the office supplies expense account.
• Security deposits received from customers or tenants are not recognized as immediate income. The Cash or Bank account is debited for the received amount. A liability account, such as Customer Deposits or Security Deposit Liability, is then credited. This acknowledges the business’s obligation to return the funds under specified conditions, or to apply them later as revenue.
• When funds are transferred between a business’s own accounts, for example, from a savings account to a checking account, this is an internal asset transfer. The checking account (asset) is debited, and the savings account (asset) is credited. This transaction only reclassifies cash within the business’s assets and has no effect on income, expenses, liabilities, or equity.

Reconciliation and Review

Regularly reconciling bank statements with accounting records is important for maintaining accurate financial information. This involves comparing internal cash records to bank records to identify discrepancies, errors, or unrecorded transactions. Reconciliation confirms all deposits, including non-income ones, are correctly posted and categorized, and helps detect unusual activity.

Reviewing key financial reports, specifically the Balance Sheet and Income Statement, ensures non-income deposits are properly handled. The Balance Sheet should clearly show increased cash assets balanced by corresponding increases in liabilities or equity. The Income Statement should not reflect these deposits as revenue, preventing an overstatement of earnings. This ongoing review process helps maintain the integrity of financial data, providing a reliable basis for business decisions and tax reporting.