Transferring security deposits in cash accounting differs significantly from accrual accounting (see the other article Transferring Security Deposits between tenants (Accrual Accounting)). The steps used in accrual accounting, involving credit notes, do not apply since credit notes do not create cash postings in cash accounting (since no cash is exchanged).
Accounting Impact of Transferring Security Deposits in Cash Accounting:
Tenant 1:
Security Deposit Application:
Debit: Security Deposits
Credit: Prepaid Income
Invoice Applied to Security Deposit Application: No cash postings
Tenant 2:
Invoice for Security Deposits: No cash postings
Credit Note: No cash postings
Proper Method for Cash Accounting:
To effectively transfer a security deposit from one tenant to another in cash accounting:
Refund the security deposit payment from Tenant 1.
Immediately record a new payment from Tenant 2 for the same date and amount.
This method creates additional transactions in your bank records, but the net effect on the account balance should be zero.