Trust Accounting Dos and Don’ts

Trust accounting for vacation rental managers (or property managers in general) (“PM”) can be complex. Add in the selection, set-up & use of VRM booking and accounting software and it can become all out dizzying! Following these dos and don'ts can help ensure compliance and maintain trust with property owners and guests.
DOS:
Separate Accounts:
Maintain separate bank accounts for operating funds and trust funds to avoid commingling. Two bank accounts (at least) are needed to appropriately administer trust accounting. While trust accounting is not required in every state for short-term rental property managers, trust accounting and separate bank accounts is the best way to track owners’ and PM’s funds. The first account is typically an operating account, which holds funds that belong to the PM. The second account is an escrow account that holds rental & security deposits and rental revenues owed to the owners not yet paid out.
Regular Reconciliation:
Perform regular reconciliations of trust accounts to ensure accuracy and transparency. This involves comparing your internal records with bank statements to verify that all transactions are accounted for correctly. Regular reconciliation helps identify discrepancies early, reducing the risk of errors and potential fraud. By keeping your accounts balanced, you maintain trust with property owners and ensure that funds are managed responsibly.
Clear Documentation:
Keep detailed records of all transactions, including deposits, withdrawals, and expenses. Accurate documentation is essential for tracking financial activities and providing transparency to owners and other stakeholders. This not only ensures compliance with regulatory requirements but also makes it easier to generate financial reports and respond to any inquiries or audits. Leverage an accounting system that pulls in data from bank feeds and credit cards to easily keep organized records of every transaction.
Compliance with Regulations:
Stay updated on state and federal regulations regarding trust accounting and ensure compliance. Trust accounting is subject to specific legal requirements that vary by jurisdiction. Regularly review and understand the regulations that apply to your business, and implement processes to adhere to these rules. Compliance not only protects your business from legal penalties but also instills confidence in your clients that their funds are being handled with integrity and professionalism.
Use Specialized Software:
Utilize vacation rental management software in conjunction with accounting software to streamline processes and reduce accounting errors. Many vacation rental systems claim to have trust accounting functionality built-in, but one big shortcoming of these apps is that they don’t offer the bank/credit card account feeds or have a way to track owner expenses automatically. This creates the manual entry of expenses in the property management system for complete owner statements, which can be tedious and time consuming, especially for companies with multiple owners and properties. The best practices is to use VRM apps for the booking, property and rental management, and use accounting software for expense tracking, operational accounting, and financial reporting.
DON’TS:
Commingling Funds:
Never mix personal or business funds with trust funds. One of the most basic requirements of trust accounting as required by law, is that there be no commingling of company funds and property owner funds. Similarly, under no circumstances should expenses that are the responsibility of the PM be paid out of the escrow account. Paying rental and property related expenses out of the escrow account (even if they are the responsibility of the property owners) can create issues if the property owner does not have enough funds in the escrow account to cover the expense. If responsibility varies based on type of expense and agreement with owner, the best practice is to use the PM operating account and bill back the expenses to the respective owner at the end of each month.
Recognize Revenue At Time of Booking:
Avoid recognizing revenue at the time of booking, as this can result in misleading financial statements. Instead, rental revenues should be deferred until check-in, check-out, or prorated over the course of the stay. This approach ensures that revenue is recorded in the correct accounting period, providing a more accurate financial picture. Failure to do so can lead to significant accounting challenges, especially if a guest cancels or modifies a stay after booking.
Inadequate Reporting:
Don’t neglect the value of detailed financial reporting – that goes for both property owners and property managers. Consistently delivering monthly owner statements that are both accurate and on-time builds trust, and neglecting this can lead to misunderstandings and a lack of confidence in your management. Similarly, as the property manager, failing to pay attention to your cash flows, profit margins, and other accounting metrics can jeopardize the survival and success of the business as a whole.
Ignoring Regulations:
Don’t overlook legal requirements; non-compliance can lead to severe penalties. In certain states, trust accounting is governed by strict regulations, and failing to comply with these laws can result in hefty fines or legal action. Additionally, most states have specific registration and tax requirements for vacation rentals. Staying informed about the latest regulations and implementing them diligently is crucial. Non-compliance can undermine the credibility of your business and result in loss of clients.
Manual Processes:
Avoid relying solely on manual processes; automate where possible to reduce errors and save time. Manual, spreadsheet-based accounting processes are prone to human errors and can be time-consuming. By implementing automated systems for trust accounting, you can increase accuracy, efficiency, and consistency. Automation helps in streamlining tasks such as transaction recording, report generation, and account reconciliation, allowing you to focus on more strategic aspects of your business.
By adhering to these dos and don’ts, vacation rental managers can effectively manage trust accounting and avoid financial headaches to ensure your business is set up for success.
Grow Your Property Management Business with Ximplifi.
Ximplifi offers a full-service accounting management solution & CFO advisory for short term rental companies.
If your goal is to take your vacation rental business to the next level, Ximplifi offers services to help you select best-in-class VRM software, automation to streamline your processes, and can even serve as an extension of your business with outsourced financial services. Learn more about our services here.
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