Partial Deposit Refunds in QuickBooks Online: Checks, Invoices, and Credit Memos

QuickBooks Online users who post tenant security deposits to a liability account keep hitting the same imbalance. They refund part of a deposit, and the books will not settle: the deposit liability stays open, the tenant card carries a stray figure, or both. We traced the accepted resolution from the community thread. It is not one transaction but several, held together by account mapping that is easy to miss.

The symptom: a liability that will not settle

The pattern repeats across reports. A landlord refunds part of a held deposit with a single check and assumes the matter is closed. The bank register looks right, but the deposit liability still shows an amount that should be gone, and nothing in the tenant ledger explains it. There is no single screen in the software that offers a partial deposit refund, which is why users go looking for one and stall.

Why does the deposit liability stay open after a partial refund?

The cause is the split. The refunded portion is money you no longer owe, so it leaves the liability as a check. The retained portion is different. It is no longer a liability at all; it has become income, and it must also come off the tenant’s balance. One check cannot carry all of those movements. The accepted fix spreads the work across a check, two items, an invoice, a credit memo, and a closing payment screen.

Step 1: write the refund check from the liability

Open the plus menu, choose Check under Vendors, and fill in the tenant and the amount being returned. The detail that matters sits in the Account details section. Pick the security deposit liability account from the Account dropdown, then save and close. Choosing an expense account here is the first common error. The refund must reduce the liability, because that is where the deposit has been recorded all along.

Step 2: create two items with different accounts

This is the step most attempts rush. Go to Settings, then Lists, then Products and services, and create two new items; a service item suits both. The first item is for the withheld amount. Set its account to wherever retained deposits or damage charges belong, which is normally an income account. The second item is for the credit memo in a moment. Point that one at the security deposit liability account itself. The mapping, not the item type, is the whole game. If both items land on income, the liability never clears.

Step 3: invoice the amount you are keeping

Under Customers, create an invoice for the tenant. Select the income-mapped item in the Product/Service field and enter the retained amount. This transaction books the kept portion as money earned rather than money owed, which is what reporting at year end expects to see.

Step 4: post a credit memo against the liability

Stay under Customers and open a credit memo. This time select the liability-mapped item and enter the same retained amount. The memo does the quiet heavy lifting. It removes the remaining deposit from the liability account and gives the tenant a credit for the identical figure, which sets up the final step.

Step 5: finish in Receive Payment

Open Receive Payment under Customers for the tenant. The screen should list both the invoice and the credit memo. Confirm the two amounts are equal and that both are selected, leaving a net of zero. If neither document appears, the software has already applied one against the other; cancel out and you are done. Skipping this screen is why some users see an open invoice long after everything else looks correct.

A sample deposit shows the math

Picture a $1,200 deposit, an $850 refund, and $350 kept for repairs. The check debits the liability by $850, dropping it to $350. The invoice posts $350 to repair income. The credit memo strips the final $350 out of the liability. Receive Payment nets the $350 credit against the $350 invoice. The end state is clean on every line: liability at zero, tenant at zero, $350 recognized as income, and the bank down by $850.

The usual slip points

• Writing the refund check against an expense account instead of the deposit liability.
• Mapping both new items to income, which strands the retained amount in the liability.
• Entering different amounts on the invoice and the credit memo, so the payment screen cannot net to zero.
• Skipping Receive Payment entirely, which leaves the invoice open on the tenant card.

One limit worth knowing

The accepted steps carry a scope note: they apply only when deposits are posted to a liability account. If deposits went straight to income at move-in, no liability ever existed, and this sequence would double-count the retention. In that setup the correction is far simpler, a check against the account the deposit originally touched. For everyone using the liability method, though, the four-part flow is what finally zeroes both the deposit line and the tenant.