Legal Question in Landlord & Tenant Law in California

You are not required to accept that. A security depoist/last month's rent deposit is separate from the monthly oabligation to pay rent. Its purpose is to provide a sum of money to protect the landlord from the tenant leaving without having paid all the rent or having damaged the property. It is not the last month's rent paid in advance. If you let the tenants handle it thier way, then you might not be able to collect for any damages to the dwelling.

You need to look at the lease agreement, but it probably says something about the security deposit not being used in lieu of rent.