Security Deposit Reduction - Addendum Procedure

[Michael R.]

Fellow Illinois landlords and property managers,

A year ago I rented a home to two individuals who met most but not all of my minimum requirements.  In order to mitigate risk, I asked that they provide 3 months of security deposit funds under the pretence that if they pay on time for 12 months I would refund all but 1 month or just apply the other 2 to their rent due.  Here we are 12 months later and they have been a great tenant so I intend to follow through with our agreement and create an addendum to their lease.  

That being said...Is it enough to simply transfer the funds from the security deposit account to our operating account as paid rent for the next 2 months or is it necessary that I refund the money to them with a receipt, have them sign the addendum, and pay their rent themselves as usual?  I've searched the security deposit laws for Illinois and haven't found a clear answer.