Trust Accounting 101
How should a broker account for trust funds? There are many ways. If you choose to do trust accounting manually, you can use ledger books, notebooks, or index cards. If your choice is the computer, accounting programs of varying degrees of simplicity or complexity are available to serve your needs.
Whatever the medium or method chosen for the accounting, the license law has certain accounting requirements where trust funds are concerned. Fortunately, those requirements are simple and basic. (Review Substantive Regulation 520-1-.08.)
The license law requires brokers who accept trust funds to account for each deposit and the subsequent disbursements from that deposit. Sound business practices should dictate the method and extent of this accounting.
Details Required for Each Deposit
For each deposit of trust funds in the account, the following information must be entered into the accounting records:
- the names of the principles in the transaction (for example the buyer and seller, tenant and landlord, or member and community association);
- the amount and date of the deposit;
- the identification of the property involved; and
- the date, amount, and name of the payee of any check issued against the funds from the deposit.
The trust account accounting requirements are based upon the idea of a cash in/cash out system; that is:
- an amount of money goes into the account as a deposit,
- at some later time one or more disbursements are made from that deposit,
- ultimately a zero balance results.
General Ledger/Checkbook Register
The basic element of a sound accounting system is a general ledger (think check book register.) The general ledger lists all the deposits and disbursements chronologically as they are deposited into and disbursed from the trust account. After each entry in the ledger, a running balance shows the total funds in the trust account.
The general ledger does not track each deposit and the disbursements from that deposit separately. In fact the record of the initial deposit of trust funds for a particular transaction may be separated by several lines or pages from the entries detailing disbursements from that deposit. Consequently, following the course of a deposit and its eventual zeroing out in the general ledger may be a tedious task.
Nevertheless, for brokers who accept only earnest money deposits, the general ledger can suffice for the required accounting of trust funds. However, many brokers also maintain sub-ledger records for each individual sales transaction. Many brokers find that if they keep a separate record on an index card or on a ledger sheet or on the computer, it is easier for them to track earnest money deposits for each sales transaction and to reconcile their outstanding trust account liability at the end of each month.
Additional Records a Must
For those brokers who manage property or community associations, additional records are necessary. For example, a broker who pays property expenses for an owner must be certain that at all times he or she is holding a sufficient amount of that owner's funds before writing a check to pay an expense. That means that the broker must be able to see at any time the amount of funds available in the trust account for each property owner.
The only practical way of doing that is for the broker to keep a sub-ledger for each owner detailing the following:
- names of the owner and the tenant;
- the address of the property;
- the date and amount of each rent collection;
- the date, payee and amount of all disbursements; and
- a running balance of funds in the owner's account.
Similarly, many property managers also maintain sub-ledger records for security deposits. Each security deposit is credited to the tenant from whom it was received and identified by property and property owner. Maintaining separate records for security deposits not only facilitates accounting for them, it also helps insure that security deposits not be used to pay property expenses unless and until the tenant has forfeited the deposit or otherwise given the broker written authority to use the deposit in that manner.
Some property management brokers use computer programs that assist them in keeping up with the balances in the accounts for individual owners or properties. When the operator enters a disbursement for a property expense, the program looks at the balance of funds on deposit for the property (or for the owner if the broker is managing more than one property for the same owner). If there is not enough money in the property's (or owner's) account to cover that disbursement, the program alerts the operator so that the disbursement can not be completed until sufficient funds exist to cover it.
Brokers who manage community associations must likewise maintain sub-ledgers for each association to assure the proper management of funds belonging to each association and to avoid mistakenly "borrowing" from the funds of one association to pay the expenses of another association.
Likewise, maintaining sub-ledger records for each association member facilitates keeping track of assessment collections, late payments and fees, and special assessments.
In summary, sound business requirements for trust accounting may exceed the bare minimum literal requirements of the license law.
The information contained in this article is believed to be current and accurate. The GREC staff reviews the contents periodically and updates it when appropriate. If you have questions or comments about this article, you may contact us at email@example.com . Last reviewed August, 2006.