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Escrow accounting records and reports financial transactions related to two separate parties. Escrows are commonly found in the banking and financial services industry. Individuals obtaining loans from banks, lenders, and financial institutions usually place money in escrow. These funds are released after specific loan conditions are met. Accounting procedures separate escrow funds from other money in an accounting ledger. Neither party has unfettered access to the money for purposes outside of the escrow guidelines.
General and interest-bearing escrow accounts are the most common in the business environment. Mortgage companies primarily use general escrow accounts. Buyers place money in this account relating to the purchase of a home. The title or mortgage company requires buyers to place money in escrow for future payments relating to mortgage interest, homeowners insurance, and property taxes. Interest-bearing accounts allow managers to accrue interest on escrow money for use by the parties involved in the financial transaction. General escrow accounts to not have this feature.
The escrow accounting equation is assets equal liabilities. No owner’s equity or retained earnings is found in escrow accounting. Escrow accountants have a fiduciary responsibility to process funds from both parties in a financial transaction. Accountants must safeguard the money from loss that can relate to either party’s failure to complete their duties in the financial transaction. Financial transactions represent individual entries into the general ledger. The general ledger contains information relating to all escrow financial transactions.
Similar to regular accounting procedures, general ledgers in escrow accounting may use sub-ledgers or journals to record financial transactions. The cash disbursements and cash receipts journals are the most common found in escrow accounting. The cash disbursements journal includes financial transactions relating to the payment of escrow funds. Paying out escrow funds occurs when one or both parties complete their duties relating to the escrow account. The cash receipts journal records all money is coming in for an escrow purposes. The cash receipts journal can include detailed information relating to each party in the escrow transaction, each party’s financial responsibility and other pertinent information.
Reconciliations are an important part of escrow accounting. Accountants will review information relating to individual escrow accounts on a weekly or monthly basis. Each escrow account is tested to ensure that the cash inflows and outflows properly account for escrow monies. Escrow account differences may need corrections to ensure each party is in full compliance with its escrow responsibilities. Escrow accounts commonly issue written statements to each party indicating the current state of the escrow account.
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