To record a deposit that is not income, post it to a liability or equity account rather than a revenue account, so the entry reflects what the money actually is: borrowed funds, your own money moving in, tax you’re holding for someone else, or a refund of something you already paid. Federal tax law defines gross income as “all income from whatever source derived,” but money you owe back or already owned is not income.1Office of the Law Revision Counsel. 26 U.S. Code 61 – Gross Income Defined Booking these deposits as revenue inflates your reported earnings, raises your tax bill, and creates problems if an examiner later reconciles the books against the bank statements.
Which Deposits Are Not Income
Several common deposits belong on the balance sheet, not the profit-and-loss statement. The account you use depends on what the money represents.
- Loan proceeds: A bank loan or line-of-credit draw is a liability because you have to pay it back. A $50,000 lender deposit increases cash and increases a Notes Payable or Loans Payable account by the same amount. No revenue is created.
- Owner contributions: Personal funds you move into the business go to Owner’s Investment or Owner’s Equity. This raises your basis in the company rather than generating taxable income.2Internal Revenue Service. S Corporation Stock and Debt Basis
- Internal transfers: Moving $2,000 from savings to checking doesn’t create wealth. The entry offsets one bank account against another with no effect on income.
- Sales tax collected: Tax you collect from a customer belongs to the government. Post it to a Sales Tax Payable liability account until you remit it. Booking it as revenue overstates income and still leaves you owing the full remittance.
- Refundable security deposits: A deposit you may have to return, such as a tenant’s rental deposit, goes to a Security Deposits liability account while the obligation to return it exists. It only becomes income if and when you keep it, for example because the tenant damaged the property or broke the lease.3Internal Revenue Service. Topic No. 414, Rental Income and Expenses
- Vendor refunds: A refund from a supplier reverses the original expense rather than creating new income. Record the deposit against the same expense account you used for the original purchase.
- Insurance reimbursements: A payout for a covered loss generally offsets the loss. Only the portion above your actual loss is a reportable gain.
How to Enter the Deposit
Before you open your accounting software, verify the amount to the penny against your bank statement or wire confirmation, and use the date the funds cleared the account (not the date you signed papers or initiated the transfer). Confirm which of your bank accounts received the money and which liability or equity account the deposit should hit.
Open the bank deposit or journal entry screen. Enter the date, select the receiving bank account, type the exact amount, and choose the correct liability or equity account. Most software suggests revenue categories by default, so check the account selection before saving. After saving, match the entry to the corresponding line in your bank feed or imported statement. Then look at the balance sheet and confirm the liability or equity balance moved by the right amount. If it doesn’t, reopen the entry and look for a data-entry error.
Fixing a Deposit That Was Booked to Revenue
If you find a non-income deposit that was posted to a revenue account, create a journal entry that debits the revenue account and credits the correct liability or equity account for the same amount. Date the correction to the original deposit date if you’re still in the same accounting period. If the error crossed into a closed period that has already been reported on a tax return, you may need to amend the return to remove the overstated income.
Documentation That Backs Up the Entry
The paperwork is what turns a bookkeeping label into something an examiner will accept. Match the record to the deposit type:
- Loan proceeds: Keep the signed loan agreement, promissory note, settlement sheet, and the lender’s year-end statements showing interest paid. Be ready to show how you used the funds.4Internal Revenue Service. Audits Records Request
- Owner contributions: Save a bank statement or transfer confirmation from the personal account showing the outgoing transfer matches the business deposit.
- Internal transfers: The sending and receiving account statements, with matching amounts and dates, are the evidence.
- Sales tax collected: Retain sales receipts or point-of-sale reports that break out the tax component and match your remittance filings.
- Security deposits: Keep the lease or agreement specifying the amount and the refund terms.
- Gifts from individuals: A signed letter from the donor confirming the gift, along with the bank record of the transfer, is the clearest proof.
Attach digital copies to the transaction inside your accounting software. IRS guidance recognizes electronic records, including scans, when kept in their original format so the metadata is preserved.5Internal Revenue Service. Managing Electronic Records From Taxpayers and Third Parties Publication 583 also recommends noting the source of each deposit on the deposit slip or in your checkbook register so the classification is clear from the start.6Internal Revenue Service. Publication 583, Starting a Business and Keeping Records
Keep supporting records for at least three years after you file the return. That window stretches to six years if you underreport gross income by more than 25 percent, and indefinitely if no return was filed or the return was fraudulent.7Internal Revenue Service. How Long Should I Keep Records? Because the whole point of these records is to rebut a claim that a deposit was unreported income, keeping them for at least six years is the safer default.
Is It a Loan or a Gift?
When a family member or friend deposits money into your business account, the IRS will ask whether it was a loan or a gift, and the answer changes the entry. A loan requires a written agreement, a repayment schedule, and interest at or above the Applicable Federal Rate, which the IRS publishes monthly. If the interest charged falls below the AFR, the shortfall can be treated as a gift from the lender to the borrower under Section 7872.8Office of the Law Revision Counsel. 26 U.S. Code 7872 – Treatment of Loans With Below-Market Interest Rates A de minimis exception applies to gift loans between individuals with a total outstanding balance at or below $10,000.
If the money is genuinely a gift, the donor (not the recipient) handles any gift tax filing. The 2026 annual exclusion is $19,000 per recipient, and gifts at or below that amount don’t require a return from the donor.9Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The recipient doesn’t report a gift as income. On the books, a gift into a business account goes to Owner’s Equity or Contributed Capital, not revenue. A loan goes to Notes Payable or Loans Payable.
Cash Deposits Over $10,000
If your business receives more than $10,000 in cash in a single transaction or in related transactions, you must file Form 8300 with the IRS within 15 days.10Internal Revenue Service. Form 8300 and Reporting Cash Payments of Over $10,000 This applies whether the cash is income, a loan repayment, or something else. “Cash” for Form 8300 purposes includes currency and, in some circumstances, cashier’s checks, money orders, and traveler’s checks.
Filing Form 8300 doesn’t change the accounting entry. A $15,000 cash loan repayment from a borrower still reduces a receivable rather than becoming revenue, even though the cash receipt has to be reported. Failing to file can bring civil penalties, and willfully failing to file can lead to criminal penalties.11Internal Revenue Service. IRS Form 8300 Reference Guide
Why the Classification Matters at Audit
The IRS uses the bank deposits method to look for unreported income: examiners total every deposit in your accounts, subtract documented non-taxable items, and treat the remainder as evidence of taxable receipts.12Internal Revenue Service. 4.10.4 Examination of Income A deposit that can’t be traced to a non-taxable source is presumed to be income, and you have to show otherwise. Common rebuttals are loan proceeds, gifts, inheritances, or transfers from another account you own, but they hold up only if you kept the records at the time the money came in.
If the IRS concludes you underreported because of negligence or a substantial understatement, the accuracy-related penalty under Section 6662 adds 20 percent of the underpaid tax, plus interest, and doubles to 40 percent for gross valuation misstatements.13Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments Classifying each deposit correctly when it lands, with the supporting document attached, is the simplest way to avoid both the tax adjustment and the penalty.