How Trust Accounting Works

Understand how transactions flow

You will need a general understanding of accounting in order to properly account and track both your owners’ and your own vacation rental management company’s books. Hopefully, this will give you a general understanding of the flow of transactions using trust accounting best practices.

Bookings & Invoices

Rental & security deposits accompany bookings, which usually occur in advance of the actual guest stay, should be recorded as rental deposits and deposited in the escrow account. With some online booking sites, payments for the rental are not received until after the guest departs. If using a property management system, the tracking of these bookings is very automated and helpful. Because no money is received, generally there is no transaction to record; however, either creating a future dated estimate or invoice in your accounting software on the date of the booking makes accounting for the receipt of the money after the departure much easier. We also recommend creating the future dated estimate or invoice even when a deposit is received (in conjunction with recording a deposit) to make the recognition of revenue, sales tax, etc. automatic after the date of the guest departure.

Management Fees

After the guest stay and usually at the end of the month, rental management commissions will need to be calculated and recorded. A VRM app becomes very useful in tracking and calculating the rental management fees owed per rental. These fees should be recorded as invoices to the owners in the property management company’s books and recorded as bills in the owners’ books. Using the upload feature in Xero is very helpful to batch create these invoices and bills. You can use an app like “Transaction Pro” to perform a similar upload in QBO.

Expenses Due To Owner

Expenses paid on behalf of the owner will depend on whether you decided to pay for those expenses out of the owners’ books (escrow account) or your operating account. If you paid via your operating account, you will want to make sure these expenses are marked as billable when first recorded. Upon the creation of the rental management fee invoices, you can simply add the billable expenses to that invoice and subsequently record as a bill on the Owners’ books. The downfall of this process is the duplicate entry on the property manager and owners’ books.

Payments Due To Owner

Every month, after rental revenue has been recognized, owners’ expenses and rental management fees recorded, it’s time to process transfers out of the escrow account. The property manager will transfer the rental management fees owed to itself from the escrow account and rental revenue less expenses and rental management fees should be transferred to the owners.

There are still other considerations, such as returning security deposits, paying sales taxes, and whether you require a retainer balance for future property expenses, but hopefully this provides an outline to follow to properly account in a trust accounting environment.

Next, learn about the Dos and Don’ts of Trust Accounting for Vacation Rental Managers.

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 software, use automation to streamline your processes, and become an extension of your business with outsourced accounting services. Learn more about our services here.