This post deals with the bookkeeping journal entries involved in accounting for funds held in escrow.
An escrow account is a cash account used to hold funds in trust for a specific purpose. For example, a business might deposit funds in an escrow account with a mortgage lender or a lawyer in relation to a property transaction.
Accounting for Funds held in Escrow Journal Entry Example
Suppose a business deposits funds of 15,000 with a third party. An escrow account holds the funds pending the completion of a property transaction. At the end of the accounting period not all of the conditions in the purchase contract have been satisfied and the third party continues to hold the escrow payment in the deposit account.
The escrow deposit remains the property of the business until all of the predetermined conditions have been satisfied, and shows as a current asset in the balance sheet.
The bookkeeping records will show the following escrow accounting journal entries.
|Escrow account deposit||15,000|
The escrow account deposit is a current asset account representing the amount held by the third party and belongs to the business until the predetermined conditions have been satisfied.
The Accounting Equation
The accounting equation, Assets = Liabilities + Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business. This is true at any time and applies to each bookkeeping transaction.
The following table shows the effect of this transaction on the accounting equation.
The escrow account accounting shows in this case that one balance sheet asset (Escrow account deposit) has increased by 15,000 representing the amount the third party is holding, and another balance sheet asset account (cash) has decreased by the same amount representing the cash payment made.
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The accounting for funds held in escrow journal entry is one of many bookkeeping entries used in accounting, discover another at the links below.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.