Using separate bank accounts for trust accounting

What is trust accounting?

When a business has to hold onto other people’s money, the law requires that the money be kept in a type of bank account called a "trust account". In the hospitality business, the guest's money is held in the trust account until it is transferred to other entities, namely, you - the property management company (PMC), the property owner, tax authorities, and third-party service providers called vendors.

Since the PMC is holding (sometimes very large amount of) funds that need to be paid to different stakeholders, at any given moment they need to:

• Know they are holding the correct amount of funds to meet all of their obligations.
• Be able to identify who owns the funds in the trust account at any point.
• Ensure they do not commingle funds (commingling of funds is when you pay one stakeholder's expenses with the funds from another stakeholder).
• Protect guests from losing their money if the short-term rental host goes out of business or fails to pay their expenses.
• Ensure that they are paying all applicable taxes and fees

Our Accounting solution uses trust accounting to do all of that by tracking the ownership of funds for multiple stakeholders as the funds move through our system. Standard accounting would not be enough, because it tracks the profit and loss of just one entity.

Recommended best practice: Separate accounts

Using a physical bank transfer between two separate bank accounts is the safest and simplest method, eliminating the need for complex clearing accounts for every transaction.

• #1 Trust account: All rents and deposits are received here.
• #2 Operating account: All business expenses are paid from here.
• Transfer: A physical bank transfer is made from the trust account to the operating account only for the exact amount of earned management fees (and approved owner reimbursements)
• Accounting: This single transfer is recorded only once as a cash-moving transaction in each system: A withdrawal on the trust side and a deposit on the operating side. This makes the rest of your bookkeeping clean and compliant.

Using one bank account is not compatible with trust accounting. Combining operating and trust accounting in a single bank account creates unnecessary double-entry, increases the workload, and fosters confusion. Using separate accounts provides clear financial boundaries and simplifies both accounting and reconciliation by isolating client funds from company funds.