Are you writing two checks?

Many utilities (rightfully so) maintain separate bank accounts for operating funds and security deposits. When you apply a customer’s security deposit and they are due a refund, are you writing two checks from your security deposit bank account? One to your utility and one to the customer? If you are, then continue reading to learn how you can do this a better way.

My example uses T-accounts, which, for me, are the clearest way to understand an accounting transaction.

Here’s an interesting story about T-accounts. Years ago (and I do mean years ago), when I worked for a software company, I was meeting with the county manager and finance director of one of our customers. The county used our utility billing software and another vendor’s accounting software. The finance director was making a pitch to change billing software because, she maintained, our software didn’t interface with their general ledger. In reality it did, but she chose not to import the general ledger entries into their accounting system.

I proceeded to explain how our system handled the general ledger interface, and even resorted to drawing T-accounts to explain it. When I did this, the county manager interrupted, saying “Wait a minute… are you a computer guy who knows accounting or an accountant who knows software?” I went on to explain to him that I was both – I spent four years in the Air Force as an accountant, but was now a programmer specializing in utility billing. My accounting training came in very handy when explaining the general ledger interface.

Back to the T-accounts. Below is an illustration, in five steps, of the life cycle of a security deposit from the time it is paid until it is applied to the customer’s final bill. These steps will show how to avoid writing two checks for each refund check.

Customer pays deposit

Step one in the process is the customer paying their security deposit when they open their account. In this illustration, the security deposit is $100.00. The Cash account for Security Deposits is debited and a liability account for Customer Deposits is credited:

T-Accounts showing customer deposit

Customer closes account

For step two, fast forward to the customer closing their account. We will assume their account is current with no outstanding, unpaid bills. When the account is closed, the deposit is applied to their account, resulting in a credit balance. In this transaction, Customer Deposits is debited and the Cash account for Security Deposits is credited, clearing the security deposit. At the same time, the Operating Cash account is debited and Accounts Receivable is credited, reflecting the credit on the customer’s account:

T-Accounts showing deposit applied to customer's account

Final bill is generated

In the third step, the customer’s final bill is generated, which in our example is $60.00. This transaction debits Accounts Receivable, leaving a $40.00 credit, and credits a revenue account, in this case Water Sales:

T-Accounts showing final bill updated to customer's account

Refund adjustment is processed

Once the final bill has been processed, the next step is to process a refund to the customer. With this transaction, Accounts Receivable is debited for $40.00, clearing the balance on the customer’s account and Refunds Payable is credited for $40.00:

T-Accounts showing refund adjustment processed

Refund check is written and updated

Finally, to complete the process, a refund check for $40.00 is written to the customer. This transaction debits Refunds Payable for $40.00 and credits the Operating Cash account for the same amount:

T-Accounts showing refund check

End result

The end result is the Operating Cash account is debited for $60.00 and Water Sales is credited for $60.00, which represents the customer’s final bill. All of the other accounts are cleared and only one check was written!

Are you doing things as easily as possible?

Is your business office doing things as easily as possible? If you’re not sure, please give me a call at 919-673-4050, or email me at
gary@utilityinformationpipeline.com to find out how a business review could help you find out.

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© 2025 Gary Sanders


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