Where Do Security Deposits Go on a Cash Flow Statement?

The cash flow statement is one of the primary financial statements prepared by companies for financial reporting. This statement covers the cash movements in cash and cash equivalent balances during a period. In accounting, the cash flow statement allows companies to report cash activity. The other financial statements use the accrual concept, which can be confusing sometimes. However, the cash flow statement presents cash activity only.

The cash flow statement covers three crucial areas in a business. These include operating, investing and financing activities. Of these activities, the first relates to any cash flow from a company’s operations. Investing activities involve any cash spent or generated from investments. Lastly, financing activities relate to how a company finances its operations and other areas. Combined, these show the net cash inflows and outflows for the company.

The cash flow statement is a crucial part of the financial reporting process for a company. It helps investors understand how a company manages its cash resources. On top of that, it also shows if the company has generated enough cash to fund its future activities. All items that involve a cash payment or receipt go on the cash flow statement. One of them may include security deposits paid to suppliers or other business associates.

What is a Security Deposit?

A security deposit is a sum of money paid to a supplier as proof for future involvement. Essentially, it refers to a prepayment from companies to suppliers to ensure future purchases. Companies also use them to guarantee the supplier will sell them subsequently. In most cases, security deposits are common when renting or leasing properties.

Security deposits are crucial in helping companies establish a working relationship with various suppliers. In the absence of these deposits, suppliers may not sell goods to a company. In some cases, security deposits are mandatory, and companies must pay them to acquire goods or services. Therefore, these are inevitable in those cases. These deposits can be refundable or non-refundable.

Related article  Purpose of Statement of Cash Flow: Why Do We Need to Prepare?

Security deposits also guarantee the buyer’s commitment to the transaction. The supplier can use these deposits as a part of their overall transaction price. In some cases, they may also use it as collateral for any future damages. For example, landlords deduct money from a security deposit to repair their property before returning the amount. The usage for these deposits may also depend on the contract between the two parties.

Primarily, security deposits serve as an intangible security measure. In other cases, it acts as tangible security in the event of damages or lost property. For the supplier, these deposits can be crucial in ensuring the safety of their supplies or assets. Most suppliers use it to guarantee that they will get repaid for any damages. For the customer, security deposits help guarantee the transaction will go ahead as expected.

Overall, security deposits are crucial in helping companies and buyers with their transactions. In some cases, they are inevitable and maybe mandatory to pay. Typically, a security deposit is a percentage or a small portion of the overall transaction price. These deposits serve as evidence of the supplier and buyer’s intention to complete the transaction. Since security deposits involve a cash payment, they also go on the cash flow statement.

Where do Security Deposits go on a Cash Flow Statement?

The treatment for security deposits on a cash flow statement depends on various factors. These items can go on different areas on this statement. While most companies pay these deposits to suppliers, they may also receive security deposits from customers. The accounting treatment for the security deposit on the cash flow statement also differs based on that factor. Usually, security deposits go under the operating or investing activities.

Companies must determine the purpose of the security deposit to know where they go on a cash flow statement. If this deposit relates to a company’s operations, it will fall under the cash flow from the operating activities section. However, some companies may also use security deposits for investing and other operations. In these cases, the security deposits will become a part of the cash flow from investing activities.

Related article  How do Deferred Income Taxes present in Statement of Cash Flow?

Another critical factor to consider is the accounting treatment for these deposits in the balance sheet. If companies treat security deposits as prepayments, they will fall under the operating activities section. However, they will not appear on the cash flow statement as a separate item. Instead, companies will include them as a part of the increase or decrease in prepayments.

Where security deposits go on the cash flow statement also differs from when companies receive them. Sometimes, companies may get these deposits from customers as an advance. Therefore, they will become a part of the cash flow from operating activities. Some companies may also charge deposits as a part of their properties and other investments. For these companies, the security deposits will fall under investing activities.

Overall, security deposits go on the cash flow statement, but the treatment may differ based on some factors. On top of that, these deposits only go on this statement if they are paid or received in cash. If security deposits involve any alternative compensation source, companies cannot include them as a part of the cash flow statement. Usually, security deposits affect the balance sheet and cash flow statement only.

Example of Security Deposits on a Cash Flow Statement

As mentioned above, security deposits may have various treatments on the cash flow statement. These treatments consider several factors. In most cases, the deposits paid or received to business parties falls under operating activities. However, the treatment under that section also differs based on other factors. On top of that, some companies also classify security deposits under cash flow from investing activities.

Related article  Cash Flow From Financing Activities: What Is Included and How To Calculate?

Examples of security deposits on a cash flow statement are below.

Security Deposits under Cash Flows from Operating Activities

Security deposits fall under cash flow from operating activities if they relate to operations. In most cases, the treatment on the cash flow statement is straightforward. A typical example of security deposits on this statement may look as below.

Cash flows from operating activities
Security deposits(XXXX)
Other operating activitiesXXXX / (XXXX)
Net cash flows from operating activitiesXXXX / (XXXX)

In the above example, the security deposits relate to payments to suppliers. In this case, these deposits constitute cash outflows. If companies receive these deposits from customers, they will become cash inflows. The treatment will remain the same.

Security deposits under cash flows from operating activities may also be a part of prepayments. In that case, companies will include them as an increase or decrease. In that case, security deposits on the cash flow statement will look as follows.

Cash flows from operating activities
Increase/decrease in prepayments(XXXX) / XXXX
Increase/decrease in other current assets(XXXX) / XXXX
Increase/decrease in current liabilitiesXXXX / (XXXX)
Net cash flows from operating activitiesXXXX / (XXXX)

In the above case, an increase in prepayments will constitute an outflow. Decreases will be an inflow. Companies also calculate this difference for other current assets and liabilities. Usually, they appear last under operating activities.

Security Deposits under Cash Flows from Investing Activities

Security deposits also appear under cash flow from investing activities. In this case, these deposits will relate to a company’s investments. These can be inflows or outflows based on being payments or receipts. Nonetheless, security deposits under cash flows from investing activities may look as follows.

Cash flows from investing activities
Security deposits(XXXX)
Other investing activitiesXXXX / (XXXX)
Net cash flows from investing activitiesXXXX / (XXXX)

Conclusion

Security deposits are payments made to suppliers to guarantee future transactions. These deposits are common for properties and other similar contracts. Usually, security deposits involve a cash payment or receipt. Therefore, they go on the cash flow statement, but the treatment may differ based on various factors. Security deposits fall under operating or investing activities based on those factors.