The three numbers
Security deposits are money you owe tenants. On any given date, three numbers should be the same:
- What you owe tenants: the total of every current tenant’s deposit, added up from their ledgers.
- What the books say: the deposit liability account in your general ledger.
- What the bank holds: the deposit account’s statement balance, plus deposits not yet at the bank, minus refunds that haven’t cleared.
That’s the “three ways.” In AppFolio, the 3-Way Reconciliation report puts all three side by side for the deposit (trust) account.
A matching total isn’t proof
Two mistakes can cancel out. A refund missing at one property and a deposit double-counted at another can leave the totals agreeing while two tenants’ balances are wrong. So once the totals agree, check property by property: what’s owed to that property’s tenants against that property’s liability in the books.
When they don’t agree
- Find the property. Compare owed-to-tenants with the books’ liability for each property. The gap lives where they differ.
- Find the tenant. Within that property, go through the Tenant Ledger for each tenant’s deposit activity: received, applied, refunded, transferred.
- Find the transaction. Usually a single entry posted on one side and not the other.
- If the books agree with tenants but not with the bank, it’s a bank-side problem: reconcile the deposit account like any other bank account, item by item.
Where deposit gaps usually come from
- A move-out refund or deduction posted in one place but not the other.
- A deposit received into the operating account instead of the deposit account.
- Interest earned on the deposit account that was never moved out or recorded.
- A deposit transferred between properties on one side only.
Keep it proven
Check it weekly and prove it fully every month, and once more as of December 31 for year-end. If the account earns interest, move it to each property’s operating account, one transfer per property. At each move-out, work in a fixed order: post the charges, attach the itemized deposit letter, make any transfer, then create the refund. Deposit rules, including whether deposits must sit in a separate account and how long you have to return them, vary by state, so check yours with your accountant. The full method is in the free playbook, with a printable deposit proof sheet.