Escrow accounts form a very specific subset in any accounting scenario. The term escrow account is generic enough to incorporate many types of accounts, each with their own set of rules. At the core, escrow accounts are cash accounts. However, their administration may require specific reporting or documentation requirements for certain types of escrow accounts, or accounts administered by certain companies or individuals.
Escrow Accounts are Trust Accounts
The purpose of an escrow account is to hold funds in trust for a specific purpose or recipient. Examples of escrow accounts include things like funds held in trust by a real estate attorney to disburse closing costs, taxes and fees on a new home purchase or funds held by a law firm for a settlement, pending disbursement. A mortgage company may hold funds in escrow to pay taxes and insurance payments on a borrower's property. Some of these escrow accounts are subject to specific rules.
Treat an Escrow Account Like a Cash Account
At its core, an escrow account is a cash account. You record journal entries for an escrow account like any other cash account. Incoming funds are recorded as deposits, while outgoing funds are debits on an escrow accounting journal. The thing that makes escrow accounts noteworthy are the reporting requirements. Because these are funds held in trust, every debit or credit must be meticulously documented; often requiring a higher level of detail than a normal cash account. The specifics vary depending on the type and purpose of the escrow account.
Additional Documentation Requirements for Escrow Accounts
Because escrow accounts are funds held in trust, the reporting and documentation requirements are meticulous. You must document each transaction in an escrow account carefully, including payer for credits, payees for debits and the purpose of each transaction. Some types of escrow accounts have specific documentation requirements to record these transactions. A real estate escrow, for example, records transactions on a HUD-1. A mortgage lender, on the other hand, may only be required to issue a quarterly or annual statement. Pooled escrow accounts may require individual client ledgers.
Some Escrow Accounts Have Special Rules
Escrow accounts for real estate funds and law offices have specific rules about how the escrow should be administered and how the funds are reported, including special balance and disbursement sheets. Laws vary by state and depending on the type of account; for example, New York lawyers have different escrow reporting requirements than Illinois real estate agents. Consult your state's professional organization or licensing board to determine where you can find information about your state's escrow account requirements.