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What Exactly Is Trust Accounting Anyway?

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Posted by HiRUM Software Solutions - 08/03/2024
A person in a red jacket holding a small toy house in the palm of her hands sat at her desk with a slight view of the back of her laptop as well as a pen on top of some papers on top of the desk.

Navigating the world of Trust Accounting can be tricky, but fear not – we’re here to break it down for you. It’s not uncommon to encounter terms that seem familiar until we realise we may not fully grasp them. One such term often thrown around is “Trust Accounting”. So what exactly is trust accounting and why do we need it in the short or long term rental industry?

What is a Trust Account?

Basically, trust accounts were introduced as a method by which someone’s funds could be securely held until such time as they became due to be released to another party or returned to the original owner.

When it comes to the rental industry, there is often a need to hold funds on behalf of a third party until the supply of goods or services has been provided. The goods and services in the rental industry generally relate to a long-term lease on an apartment or perhaps a partial or full payment towards a future holiday booking.

Investors who offer their properties up to long term tenants may often agree to place some of their own funds “on hold” to ensure funds are available for emergency repairs or replacements. The agent is required to operate a licensed trust account and will hold these funds in their trust account until such time as they are used for repairs or else released back to the apartment owner. In addition, the tenant would usually also deposit their periodic rental payments into the same trust account.

In the short term rental industry, guests are often asked to pay a deposit to secure their desired holiday accommodation, with these funds being held in a trust account until their date of arrival. Once the guest arrives, payment is generally made for the balance of the accommodation and this too is deposited into the same trust account.

These funds remain “in trust” until such time as they are dispersed to the legal owner, which generally means the owner of the accommodation, along with the management company operating the trust account.

How Does Trust Accounting Work?

How these funds are dispersed is calculated based on the rental agreement between the accommodation owner and the business operator. Most operators would use specialised industry software to calculate an accurate split between the parties, with the software producing detailed reporting for transparency and auditing purposes.

The operator also needs to produce a “3-Way Balance”, which is essentially a summary of what transactions have transpired within the trust account during any given period, generally a calendar month.

No funds should ever be dispersed from a trust account unless it has been fully reconciled, with all three numbers on the report matching. These numbers summarise funds received, funds paid out and funds remaining in the trust account at the end of the reconciliation period.
The business owner also needs to send detailed statements to the owners of the accommodation property, outlining how the funds received from any guest or tenant have been applied and dispersed.

That’s pretty much it, a basic introduction to the term Trust Accounting!

If you’re looking for a world-class and fully Australian-compliant Trust Accounting platform to help you run your accommodation business, HiRUM Software Solutions stands as a proven leader with over 26 years of expertise. Contact the team today to explore a demo and experience the solution firsthand.

 

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