Escrow deposits are common in the banking industry, with accounting procedures separating escrow funds from other money. Custodial accounting involves reconciliations and a fiduciary responsibility to protect funds from losses. Cash disbursement and cash receipt journals are used, and escrow accounts issue written statements to each party.
Trust accounting records and financial transaction reports related to two separate parties. Escrow deposits are commonly found in the banking and financial services industry. People who get loans from banks, lenders, and financial institutions generally place money in escrow. These funds are released after specific loan conditions are met. Accounting procedures separate escrow funds from other money in a ledger. Neither party has unrestricted access to the money for purposes outside of the custody guidelines.
General and interest-bearing escrow accounts are the most common in the business environment. Mortgage companies primarily use general deposit accounts. Buyers deposit money into this account in connection with the purchase of a home. The title or mortgage company requires buyers to place money in escrow for future payments related to mortgage interest, homeowners insurance, and property taxes. Interest-bearing accounts allow managers to accumulate interest on the money in escrow for the use of the parties involved in the financial transaction. Custody accounts general to not have this feature.
The custody accounting equation is assets equal liabilities. There is no net worth or retained earnings found in deposit accounting. Escrow accountants have a fiduciary responsibility to process funds from both parties in a financial transaction. Accountants must protect money from losses that may be related to the failure of either party to meet its obligations in the financial transaction. Financial transactions represent individual entries in the general ledger. The general ledger contains information related to all custodial financial transactions.
Similar to regular accounting procedures, general ledgers in custodial accounting may use sub-ledgers or journals to record financial transactions. Cash disbursement and cash receipt journals are the most common found in custodial accounting. The cash disbursement journal includes financial transactions related to the payment of escrow funds. Payment of escrow funds occurs when one or both parties complete their duties related to the escrow account. The cash receipts journal records all the money that comes in for custodial purposes. The cash receipts journal may include detailed information related to each party to the escrow transaction, the financial responsibility of each party, and other pertinent information.
Reconciliations are an important part of custodial accounting. Accountants will review information related to individual deposit accounts on a weekly or monthly basis. Each escrow account is tested to ensure that cash inflows and outflows properly account for the escrow funds. Escrow account differences may need correction to ensure that each party is in full compliance with its escrow responsibilities. Escrow accounts typically issue written statements to each party indicating the current status of the escrow account.
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