Accounting for Funds held in Escrow

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.

Accounting for Funds held in Escrow Journal Entry
Account Debit Credit
Escrow account deposit 15,000
Cash 15,000
Total 15,000 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.

Accounting for Funds held in Escrow

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.

Popular Double Entry Bookkeeping Examples

The accounting for funds held in escrow journal entry is one of many bookkeeping entries used in accounting, discover another at the links below.

Last modified July 16th, 2019 by Michael Brown

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 in 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 BSc from Loughborough University.

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