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Trust Account Bookkeeping Basics for Small Business Owners

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Trust account bookkeeping is a form of bookkeeping used exclusively for trust transactions, where a trustee will record the receipt and payment of other people’s money into individual trust ledger accounts maintained for the person from or on whose behalf the money was received. The laws regarding trust account bookkeeping vary state by state, so check the requirements where you live. This blog will focus on the laws in place in Queensland, however doing your own research is vital to ensuring you’re following the law where you live.

Who uses Trust Account Bookkeeping?

Trust account bookkeeping is used by several different industries and professions that involve holding money for other people. For example, real estate agents use them to hold bond for rental tenants, law firms use them to hold funds on behalf of clients for purposes such as conveyancing, estate management, property settlements or court proceedings. Trust account bookkeeping is crucial for these kinds of businesses, as the funds do not belong to the trustee or business but are instead being held on behalf of another party. In order to increase accuracy, many small business owners choose to delegate their trust account bookkeeping to third parties to ensure that the management of trust funds is more accurate, leading to less issues down the line.

Trust account bookkeeping is important because the accountant, solicitor or licensee who receives money on behalf of another person is required to account to that person – the money is protected to ensure that it cannot be used for any purpose other than instructed and must be passed on, with laws that hold the accountant, solicitor or licensee responsible for the money.

Why is trust account bookkeeping different from other kinds of accounting or bookkeeping?

There are a few differences that set trust account bookkeeping apart from other kinds of accounting or bookkeeping. For example, trust receipting must be done daily with receipts issued as soon as possible to avoid issues when being audited. There also must be written authority for funds to be released. For example, if a real estate is holding deposit money in a trust account so that someone can buy a house, those funds can’t be released to either the buyer or seller without written consent – either a settlement or a termination. Trust account bookkeeping also must be completely transparent, as a paper trail to prove regular, daily reconciliations is vital to prove that the funds aren’t being misused.

How to correctly set up for trust account bookkeeping

Setting up trust account bookkeeping correctly is extremely important. You – the person managing client funds – are the trustee of the trust account and must therefore comply with trust account legislation. A trustee must meet all prescribed requirements of the Trust Accounts Act 1973 and the Regulation, report annually to the entity that oversees trust accounts in Queensland and provide other information requested by the Department of Justice and Attorney-General.

Before you set up a trust account with your bank, you will also need to let the Queensland Government know that you intend to create a new trust account, as well as giving them the name and branch of the financial institution where the account will be set up. Within 14 days of setting up a trust account, you must lodge a Form 1 – New trust account in order to let the government know that you have become a trustee under the Act.

You will then need to appoint an auditor to the account and advise the Queensland Government of this appointment, including ensuring the auditor meets the criteria and providing their full name, business address and have the auditor endorse their appointment.

Records are also kept and submitted for auditing as to who can access the trust funds, such as your account’s representative who can withdraw trust funds for distribution and any person who is authorised to sign on the trust bank account. In order to prevent fraud, it’s very common for two signatures to be required to withdraw trust funds. Alternatively, an appointed trustee may be able to sign solely.

With yourself as the appointed trustee, the government informed and your auditor appointed, your trust account should be ready to go.

How to properly manage trust account bookkeeping

It’s vitally important for a trust account to be managed correctly. These kinds of accounts are heavily scrutinised to ensure the funds are not being mismanaged, so making sure everything is taken care of according to the Act is very important in order to avoid getting into hot water.

The most important thing to remember when managing a trust account is daily reconciliation – yes, every single business day you need to reconcile. While the Act specifies that reconciliations are only required monthly, doing them every day helps to avoid end-of-month stress, makes it easier to spot theft or fraud, helps you pass audits and makes it extremely easy to spot mistakes before they get too big to handle.

Common problems that may arise with trust account bookkeeping

No system is infallible, including trust account bookkeeping. It’s important to be aware of the mistakes that can arise in trust account bookkeeping, so you can prepare with strategies to avoid these mistakes or create plans for how to recover afterwards.

Some common mistakes include:

  • Incorrect allocation of funds to the correct client
  • Incorrect receipting of the value of funds
  • Withdrawing the incorrect amount of funds where there are insufficient funds being held
  • Inadequate notions held for unusual transactions
  • Not notifying the trustee of errors made in receipt or distribution of funds
  • Missing required materials to support transactions – missing receipts, authorities, cheque butts, etc
  • Withdrawing funds without the correct authority

Another more serious issue is when funds are withdrawn for a purpose for which it was not intended. This seems like a fairly obvious mistake, but it can be very tempting when your business is in dire need of funds. Discrepancies made as a result will no doubt snowball into a bigger problem, resulting in audit breaches and other, more severe consequences as a result.

So, what now?

Trust account bookkeeping is one of the more challenging bookkeeping practices out there, but it doesn’t have to be. Having a deep understanding of the laws and acts surrounding this practice and staying up to date with your reconciliations can make a world of difference when navigating trust account bookkeeping. If you have any questions that you’d like answered about trust account bookkeeping your business, our friendly team of bookkeepers are more than happy to help answer them! Just click here to book a free 15-minute strategy session.

Our bookkeepers also have plenty of experience in managing trust accounts on behalf of other businesses. When you outsource to ProfitAbility Virtual Assistance, you’ll not only save time and money but you’ll also be able to rest assured knowing that your trust accounts will be well managed and thoroughly checked according to the guidelines and best practices set out in the Act. Trust account bookkeeping may seem intimidating, however you’ll be sure to find success by following the guidelines, reconciling daily and collaborating with a third party you’ll keep both your customers and the Department happy.

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Rachael Mills

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