Trust fund records, reconciliation, and shortages

Two records, two questions

California trust fund accounting must show both what happened to the money and whose money it is. The overall account record tracks receipts and disbursements; separate beneficiary or transaction records identify individual balances and the broker's liabilities.

The chronological account record

Under 10 CCR § 2831, a broker records all trust funds received, including uncashed checks held under a principal's instructions. The chronological, columnar record includes:

Date received, from whom received, and amount received.
Deposit date for funds deposited in an account.
Check number and disbursement date for previously deposited funds.
Identity of the other depository and date forwarded for funds not deposited in the account.
Daily account balance.

Each bank account containing trust funds requires a record of receipts and disbursements. Journals or automated systems complying with generally accepted accounting principles may satisfy the requirement if they contain the required elements and readily permit tracing and reconciliation. Software alone does not establish compliance.

Reconcile individual balances to the account record

Under 10 CCR § 2831.2, reconcile the balance of all separate beneficiary or transaction records with the overall record required by § 2831 at least once a month, except in months when the bank account had no activity. Maintain a reconciliation record identifying the bank account name and number, reconciliation date, account number or name of the principals, beneficiaries, or transactions, and the trust fund liability to each.

Owner A has a six thousand dollar balance and owner B has a four thousand dollar balance. Their balances total ten thousand dollars of trust fund liability. Compare that total with the overall account record at least monthly, except in months without bank account activity, and document the reconciliation. If adjusted available funds are nine thousand five hundred dollars against ten thousand dollars owed, there is a five hundred dollar shortage. — Individual balances explain total liability; reconciliation tests agreement with the overall record.

Comparing the books with the bank statement is also a useful accounting control. Outstanding checks and deposits in transit may explain differences; an unexplained difference requires investigation. Do not confuse a daily balance entry with a requirement to perform the separate-record reconciliation daily.

Identify shortages and control disbursements

If individual liabilities are $6,000 and $4,000, total liability is $10,000. Adjusted available funds of $9,500 leave a $500 shortage: $10,000 minus $9,500. Investigate and correct the cause; changing another beneficiary's ledger to conceal the gap does not restore money.

Under 10 CCR § 2832.1, obtain written consent from every principal owning funds in the account before each disbursement that would reduce its balance below the broker's existing aggregate trust fund liability. Consent from the payee alone is insufficient. This requirement does not replace the instructions governing entitlement to disbursement under Bus. & Prof. Code § 10145. Delegating signature authority does not relieve the broker of responsibility under 10 CCR § 2834.