Follow the life of a guest deposit as we introduce and apply trust accounting concepts to a mock reservation
In this article
What is trust accounting?
Put simply, a trust account is used to receive, hold and ultimately distribute money on behalf of one or more interested parties.
Trust accounting involves tracking a dollar over time as certain events occur that dictate how that dollar is divided among (and ultimately paid out to) those parties.
Trust accounting in the vacation rental industry
In the vacation rental industry, these parties most often include guests, tax authorities, property owners and the property manager. We’ll refer to each of these parties as “buckets.”
Because every dollar held in a trust account is ultimately payable to an outside party, by nature, the assets of a trust account always equal its liabilities.
Assets = Liabilities
Assets of a trust account are primarily cash, but can include some short-lived receivables.
Liabilities of the trust account primarily include guest deposits, payables to the property manager, payables to tax authorities, and payables to property owners. They can also include payables to third-party service providers.
|
Assets |
Liabilities (“Buckets”) |
|
Cash |
Guest deposits |
|
Accounts receivable (example: guest payments on Airbnb stays that are in transit from Airbnb to the trust account) |
Payables to the Property Manager (commissions, cleaning fees, reimbursable expenses) |
|
Payables to Tax Authorities (taxes collected from guests) |
|
|
Payables to Owners (net rental income, i.e. the remainder - guests deposits minus payables to PM minus payables to tax authorities) |
|
|
Bills from vendors for owner-related expenses that will be paid directly from the trust account (i.e. not reimbursable to the property manager) |
It’s no surprise that the most important financial statement with respect to trust accounting is the balance sheet. At any given time, the balance sheet provides a snapshot of how much cash is sitting in each party’s “bucket.”
The lifecycle of a guest deposit
Let’s dive in with an example.
The facts
This is Gary Guest. It’s a cold night in January, and Gary’s stuck at work, so he takes a break to plan a family vacation for next summer.
Gary hops online and finds just what he’s looking for: an affordable bungalow within walking distance to the beach.
Before submitting his reservation request, Gary reviews the itemized invoice:
|
Destination |
Beachside Bungalow, Beachside, CA |
|
Property Manager |
Vicky’s Vacation Rentals |
|
Booking date |
January 9, 2020 |
|
Arrival date |
July 16, 2020 |
|
Departure date |
July 23, 2020 |
|
Accommodation Fare |
$2,000 |
|
Cleaning Fee |
$400 |
|
Taxes - City of Beachside |
$200 |
|
Reservation Total |
$2,600 |
|
Due upon booking |
$1,000 |
|
Due upon arrival |
$1,600 |
Accounting for advance deposits
Vicky requires a $1,000 deposit upon booking. Gary’s happy with the deal he’s found, so he enters his credit card information and submits his reservation request.
Over in Beachside, Vicky reviews and accepts Gary’s reservation request. Gary’s credit card is charged $1,000 which is deposited into Vicky’s Trust Bank Account. Vicky records the deposit in her accounting system.
Let’s take a look at the trust account balance sheet on January 9 as a result of this transaction:
|
Account |
Type |
Amount |
Increase/ Decrease |
Bucket |
Bucket Balance |
|
Trust Bank Account |
Asset |
$1,000 |
Increase |
- |
$1,000 |
|
Reservation Deposits |
Liability |
$1,000 |
Increase |
Guest |
$1,000 |
|
Owner Income Payable |
Liability |
$0 |
- |
Owner |
$0 |
|
Cleaning Fee Payable |
Liability |
$0 |
- |
Property Manager |
$0 |
|
Commission Payable |
Liability |
$0 |
- |
Property Manager |
$0 |
|
Taxes Payable |
Liability |
$0 |
- |
Tax Authority |
$0 |
Because Vicky hasn’t fulfilled her obligation to the guest yet, the $1,000 hasn’t been earned. So she recognizes Gary’s deposit as a liability on the balance sheet.
Months later, Gary and his family board a plane bound for Beachside, and Vicky prepares Beachside Bungalow for their arrival. The Guests arrive and settle in for a relaxing week ahead.
After the Guests are comfortably checked in, Vicky charges Gary’s credit card for the balance of the reservation total, as stipulated in her rental agreement. She records another entry in her ledger to account for the second payment:
|
Account |
Type |
Amount |
Increase/ Decrease |
Bucket |
Bucket Balance |
|
Trust Bank Account |
Asset |
$1,600 |
Increase |
- |
$2,600 |
|
Reservation Deposits |
Liability |
$1,600 |
Increase |
Guest |
$2,600 |
|
Owner Income Payable |
Liability |
$0 |
- |
Owner |
$0 |
|
Cleaning Fee Payable |
Liability |
$0 |
- |
Property Manager |
$0 |
|
Commission Payable |
Liability |
$0 |
- |
Property Manager |
$0 |
|
Taxes Payable |
Liability |
$0 |
- |
Tax Authority |
$0 |
Accounting for reservation income
Now that the Guests have checked in, the $2,600 paid to date has been “earned.” Vicky records an entry in her accounting system on July 16 to move the money out of the “Guest” bucket and into three new buckets. Because Vicky manages and pays for the housekeeping at Beachside Bungalow herself, she retains the cleaning fee paid by the guest.
|
Account |
Type |
Amount |
Increase/ Decrease |
Bucket |
Bucket Balance |
|
Trust Bank Account |
Asset |
$0 |
- |
- |
$2,600 |
|
Reservation Deposits |
Liability |
$2,600 |
Decrease |
Guest |
$0 |
|
Owner Income Payable |
Liability |
$2,000 |
Increase |
Owner |
$2,000 |
|
Cleaning Fee Payable |
Liability |
$400 |
Increase |
Property Manager |
$400 |
|
Commission Payable |
Liability |
$0 |
- |
Property Manager |
$0 |
|
Taxes Payable |
Liability |
$200 |
Increase |
Tax Authority |
$200 |
Accounting for commissions
Vicky loves her job, but doesn’t work for free, so she’s contracted with Olivia Owner to take 20% of all rental income earned at Beachside Bungalow. Vicky records another entry in her ledger to move her 20% commission from the Owner bucket to the Manager bucket:
|
Account |
Type |
Amount |
Increase/ Decrease |
Bucket |
Bucket Balance |
|
Trust Bank Account |
Asset |
$0 |
- |
- |
$2,600 |
|
Reservation Deposits |
Liability |
$0 |
- |
Guest |
$0 |
|
Owner Income Payable |
Liability |
$400 |
Decrease |
Owner |
$1,600 |
|
Cleaning Fee Payable |
Liability |
$0 |
- |
Property Manager |
$400 |
|
Commission Payable |
Liability |
$400 |
Increase |
Property Manager |
$400 |
|
Taxes Payable |
Liability |
$0 |
- |
Tax Authority |
$200 |
Accounting for cleaning fees
The Guests’ vacation goes off without a hiccup and they return home, already planning their return for next year.
Vicky sends in her housekeeping contractor, Carl Cleaner, to prepare the bungalow for the next arrival. Carl is the best around, and he knows it, so he expects prompt payment upon completing a job. Vicky’s maintenance and reservation staff are payrolled, which also happens to be due tomorrow.
Luckily, Vicky’s been keeping her books current, so she knows exactly how much money within the Trust Bank Account is sitting in her “bucket.” She doesn’t need to worry about “borrowing” from other buckets, and doesn’t need to wait to reconcile and close her books at month end in order to pay herself. Vicky “empties” her bucket by transferring $800 ($400 cleaning fee + $400 commission) from the Trust Bank Account to her Operating Bank Account. To keep her books current, she records the following entry:
|
Account |
Type |
Amount |
Increase/ Decrease |
Bucket |
Bucket Balance |
|
Trust Bank Account |
Asset |
$800 |
Decrease |
- |
$1,800 |
|
Reservation Deposits |
Liability |
$0 |
- |
Guest |
$0 |
|
Owner Income Payable |
Liability |
$0 |
- |
Owner |
$1,600 |
|
Cleaning Fee Payable |
Liability |
$400 |
Decrease |
Property Manager |
$0 |
|
Commission Payable |
Liability |
$400 |
Decrease |
Property Manager |
$0 |
|
Taxes Payable |
Liability |
$0 |
- |
Tax Authority |
$200 |
Accounting for owner payouts
At the end of the month, Vicky’s ready to distribute the money in the remaining buckets to the respective parties: Olivia Owner and the City of Beachside.
Vicky reviews her ledger to find $1,600 in Olivia’s bucket ($2,000 rental income, minus Vicky’s $400 commission). Vicky completes a bank transfer of $1,600 from her Trust Bank account to Olivia’s bank account. She records the following entry in her ledger:
|
Account |
Type |
Amount |
Increase/ Decrease |
Bucket |
Bucket Balance |
|
Trust Bank Account |
Asset |
$1,600 |
Decrease |
- |
$200 |
|
Reservation Deposits |
Liability |
$0 |
- |
Guest |
$0 |
|
Owner Income Payable |
Liability |
$1,600 |
Decrease |
Owner |
$0 |
|
Cleaning Fee Payable |
Liability |
$0 |
- |
Property Manager |
$0 |
|
Commission Payable |
Liability |
$0 |
- |
Property Manager |
$0 |
|
Taxes Payable |
Liability |
$0 |
- |
Tax Authority |
$200 |
Accounting for taxes
Finally, Olivia files her sales tax return with the City of Beachside, remits the $200 collected from Gary and records the following entry in her ledger:
|
Account |
Type |
Amount |
Increase/ Decrease |
Bucket |
Bucket Balance |
|
Trust Bank Account |
Asset |
$200 |
Decrease |
- |
$0 |
|
Reservation Deposits |
Liability |
$0 |
- |
Guest |
$0 |
|
Owner Income Payable |
Liability |
$0 |
- |
Owner |
$0 |
|
Cleaning Fee Payable |
Liability |
$0 |
- |
Property Manager |
$0 |
|
Commission Payable |
Liability |
$0 |
- |
Property Manager |
$0 |
|
Taxes Payable |
Liability |
$200 |
Decrease |
Tax Authority |
$0 |
At this point, the lifecycle of the guest deposit is complete. All assets (cash) and liabilities of the trust account have been exhausted.
What's next?
Because she kept her books neat, tidy and current, Vicky always knew how much cash was in her bucket at any point in time, allowing her to pay herself, her vendors and her staff straightaway, without worrying about whether she was dipping to other buckets.
Proud, but exhausted, Vicky now fully appreciates the complexities of trust accounting and the level of effort required to manually account for each dollar throughout its lifecycle. She understands the importance of following industry best practices, but realizes there aren’t enough hours in the day to devote to bookkeeping while managing a growing vacation rental management business.
Luckily, VRPlatform, Ximplifi’s virtual vacation rental accountant, is always for hire.
Read on to learn how VRPlatform automates this same workflow.