ACCOUNTING RECORDS

General Requirements

An important aspect of the broker’s fiduciary responsibility to the client is the maintenance of adequate records
to account for trust funds received and disbursed. This is true whether the funds are deposited to the trust fund
bank account, sent to escrow, held uncashed as authorized under Commissioner’s Regulation 2832, or released
to the owner(s) of the funds. These records:

1. provide a basis upon which the broker can prepare an accurate accounting for clients.

2. state the amount of money the broker owes the account beneficiaries at any one time. (This is especially
important when there are a large number of transactions.)

3. prove whether or not there is an imbalance in the trust account. Some brokers audited by DRE have
disagreed that their trust accounts had a shortage or an overage in the amount disclosed by the audit, but
could not provide documentation to support their position.

4. guarantee that beneficiary funds deposited in the trust account will be insured up to the maximum FDIC
insurance coverage.

There are two types of accounting records that may be used for trust funds: columnar records in the formats
prescribed by Commissioner’s Regulations 2831 and 2831.1; and records other than columnar that are in
accordance with generally accepted accounting practices which include details specified in subdivision (a) of the
Regulations and are in a format that will readily enable tracing and reconciliation in accordance with Section
2831.2. Regardless of the type of records used, they must include the following information:

1. all trust fund receipts and disbursements, with pertinent details, presented in chronological sequence;

2. the balance of the trust fund account, based on recorded transactions;

3. all receipts and disbursements affecting each beneficiary’s balance, presented in chronological sequence;
and

4. the balance owing to each beneficiary or for each transaction.

Either manually produced or computerized accounting records are acceptable. The type and form of records
appropriate to a particular real estate operation as well as the means of processing transactions will depend on
factors such as the nature of the business, the number of clients, the volume of transactions, and the types of
reports needed. For example, manual recording on columnar records might be satisfactory for a broker handling
a small number of transactions, while a computerized system might be more appropriate and practical for a large
property management operation.

Columnar Records

A broker may decide to use the columnar records prescribed by Commissioner’s Regulations 2831 and 2831.1.
The records required will depend on whether the trust funds received are deposited to the trust account or are
forwarded to an escrow depository or to the owner of the funds. These records are:

1. Columnar Record of All Trust Funds Received and Paid Out - Trust Fund Bank Account (DRE form RE
4522);

2. Separate Record for Each Beneficiary or Transaction (DRE form RE 4523); and

3. Record of All Trust Funds Received - Not Placed in Broker’s Trust Account (DRE form RE 4524).

The first two records are required when trust funds are received and deposited to the trust fund bank account.

The third record is required when trust funds received are not deposited to the trust account, but are instead
forwarded to the authorized person(s).

If the trust fund account involves clients’ funds from rental properties managed by the broker, the Separate
Record for Each Property Managed (DRE form RE 4525) may be used in lieu of the Separate Record for Each
Beneficiary or Transaction.

A broker who has an escrow division pursuant to Financial Code Section 17006(a)(4) must keep the above
mentioned records for escrow funds. (Commissioner’s Regulation 2951)

Record of All Trust Funds Received and Paid Out - Trust Fund Bank Account

This record is used to journalize all trust funds deposited to and disbursed from the trust fund bank account. At a
minimum, it must show the following information in columnar form: date funds were received; name of payee or
payor; amount received; date of deposit; amount paid out; check number and date; and the daily balance of the
trust account.

All transactions affecting the trust account are entered in chronological order on this record regardless of payee,
payor or beneficiary. If there is more than one trust fund bank account, a different columnar record must be
maintained for each account, pursuant to Commissioner’s Regulation 2831.

Separate Record for Each Beneficiary or Transaction

This record is maintained to account for funds received from or for the account of each beneficiary, or for each
transaction, and deposited to the trust account. With this record, the broker can ascertain the funds owed to each
beneficiary or for each transaction. The record must show the following in chronological order: date of deposit;

amount of deposit; name of payee or payor; check number; date and amount; and balance of the individual
account after posting transactions on any date.

A separate record must be maintained for each beneficiary or transaction from whom the broker received funds
that were deposited to the trust fund bank account. If the broker has more than one trust account, each account
must have its own set of beneficiary records so that they can be reconciled with the individual trust fund bank
account record required by Commissioner’s Regulation 2831.2.

Record of All Trust Funds Received - Not Placed in Broker’s Trust Account

This record is used to keep track of funds received and not deposited to a trust fund bank account. In this
situation, the broker is handling the funds and must keep records of same. Examples are:

1. earnest money deposits forwarded to escrow;

2. rents forwarded to landlords; and

3. borrowers’ payments forwarded to lenders.

This record must show the date funds were received, the form of payment (check, note, etc.), amount received,
description of property, identity of the person to whom funds were forwarded, and date of disposition. Trust
fund receipts are recorded in chronological sequence, while their disposition is recorded in the same line where
the corresponding receipt is recorded.

Transaction folders usually maintained by a broker for each real estate sales transaction showing the receipt and
disposition of undeposited checks are not acceptable alternatives to the Record of Trust Funds Received But Not
Deposited to the Trust Fund Bank Account.

An exception to this record keeping requirement is provided in Commissioner’s Regulation 2831(e), which
states that a broker is not required to keep records of checks made payable to service providers, including but
not limited to escrow, credit and appraisal services, when the total amount of such checks for any transaction
does not exceed $1,000. However, a broker shall retain for three years copies of receipts issued or obtained in
connection with the receipt and distribution of such checks and, upon request of the Department or the maker of
the checks, a broker must account for the receipt and distribution of the checks.

Separate Record for Each Property Managed

This record is similar to, and serves the same purpose as, the Separate Record for Each Beneficiary or
Transaction. It does not have to be maintained if a separate record is already used for a property owner’s
account. The Separate Record for Each Property Managed is useful when the broker wants to show some
detailed information about a specific property being managed.

ADDITIONAL REQUIREMENTS - DOCUMENTS

The following is an additional requirement of the Real Estate Law and the Commissioner’s Regulations relating
to the preparation and management of real estate transaction documents.

Person Signing Contract to be Given Copy

Under Business and Professions Code Section 10142, any time a licensee prepares or has prepared an agreement
authorizing or employing that licensee to perform any acts for which a real estate license is required or when the
licensee obtains the signature of any person to any contract pertaining to such services or transaction, the
licensee must deliver a copy of the agreement to the person signing it at the time the signature is obtained.
Examples of such documents are listing agreements, real estate purchase contract and receipt for deposit forms,
addenda to contracts, and property management agreements.

AUDITS AND EXAMINATIONS

Because of the importance of trust fund handling, the Commissioner has an ongoing program of examining
brokers’ records. As necessary, audited licensees are made aware of deficiencies in trust fund handling and
record keeping. If an audit discloses actual trust fund imbalances or money handling procedures which may
cause monetary loss, appropriate disciplinary proceedings are initiated.

Section 10148 of the Business and Professions Code provides that a real estate broker shall retain for three years
copies of all listings, deposit receipts, canceled checks, trust records, and other documents executed by or
obtained by the broker in connection with any transaction for which a real estate broker license is required. The
retention period shall run from the date of the closing of the transaction or from the date of the listing if the
transaction is not consummated. After notice, such books, accounts and records shall be made available for
examination, inspection and copying by the Commissioner or a designated representative during regular
business hours, and shall, upon the appearance of sufficient cause, be subject to audit without further notice,
except that such audit shall not be harassing in nature.

DOCUMENTATION REQUIREMENTS

Activities and Related Documents

In addition to accounting records, the Department of Real Estate requires that the broker maintain all documents
prepared or obtained in connection with any real estate transaction handled. Here is a list of typical activities and
the corresponding documentation.

Activity

1. Receiving trust funds in the form of:
Purchase deposits from buyers

Rents and security deposits from tenants
Other receipts

2. Depositing trust funds

3. Forwarding buyers’ checks to escrow

4. Returning buyers’ checks

5. Disbursing trust funds

6. Receiving offers and counteroffers from buyers
and sellers

7. Collecting management fees from the trust fund
bank account

8. Reconciling bank account record with separate
beneficiary records

Documentation

• Real estate purchase contract and receipt for
deposit, signed by the buyer

• Collection receipts

• Collection receipts

• Bank deposit slips

• Receipt from title/escrow company and copy

of check

• Copy of buyer’s check signed and dated by
buyer, signifying buyer’s receipt of check

• Checks issued

• Supporting papers for the checks, such as

invoices, escrow statements, billings,
receipts, etc.

• Real estate purchase contract and receipt for

deposit, signed by respective parties

• Agency disclosure statement

• Transfer disclosure statement

• Property management agreements between

broker and property owners. (Note: If only
one trust fund check is issued for
management fees charged to various
property owners, there should be a schedule
or listing on file showing each property and
amount charged, and the total amount, which
should agree with the check amount.)

• Cancelled checks

• Record of reconciliation

GENERAL INFORMATION

Trust Funds and Non-Trust Funds

Since trust funds must be handled in a special manner, a licensee must be able to distinguish trust funds from
non-trust funds. Trust funds are money or other things of value that are received by a broker or salesperson on
behalf of a principal or any other person, and which are held for the benefit of others in the performance of any
acts for which a real estate license is required. Trust funds may be cash or non-cash items. Some examples are;
cash; a check used as a purchase deposit (whether made payable to the broker or to an escrow or title company);
a personal note made payable to the seller; or even an automobile’s “pink slip” given as a deposit.

The discussions in this chapter pertain to real estate trust funds received by licensees, and not to non-trust funds
such as real estate commissions, general operating funds, and rents and deposits from broker-owned real estate.
These other types of funds, as long as not commingled with trust funds, are not subject to the Real Estate Law
and Commissioner’s Regulations. It should be noted, however, that under certain circumstances the Department
of Real Estate does have the jurisdiction to look into transactions involving non-trust funds.

Why a Trust Account?

A trust account is set up as a means to separate trust funds from non-trust funds. Although it can certainly be
argued that keeping trust funds in a trust account will not prevent a dishonest broker from misusing the funds,
separating client’s funds from the broker’s own funds provides a better physical and accounting control over the
trust funds.

An important reason for designating a trust fund depository as a trust account is the protection afforded
principals’ funds in situations where legal action is taken against the broker or if the broker becomes
incapacitated or dies. Trust funds held in a true trust account cannot be ‘‘frozen” pending litigation against the
broker or during probate.

Trust funds also have better insurance protection if deposited into a trust account. The general counsel of the
FDIC, in an opinion in 1965, held that funds of various owners which are placed in a custodial deposit (trust
account) in an insured bank will be recognized for insurance purposes to the same extent as if the owners’ names
and interests in the account are individually disclosed on the records of the bank, provided the trust account is
specifically designated as custodial and the name and interest of each owner of funds in the account are
disclosed on the depositor’s records. Each client with funds deposited in a trust account maintained with a
federally insured bank is insured by the FDIC up to $250,000, as opposed to just $250,000 for the entire
account, as long as the regulatory requirements are met.

Trust Fund Handling Requirements

A typical trust fund transaction begins with the broker or salesperson receiving trust funds from a principal in
connection with the purchase or lease of real property. According to Business and Professions Code Section
10145, trust funds received must be placed into the hands of the owner(s) of the funds, into a neutral escrow
depository, or into a trust account maintained pursuant to Commissioner’s Regulation 2832 not later than three
business days following receipt of the funds by the broker or by the broker’s salesperson.

An exception to this rule is when a check is received from an offeror in connection with an offer to purchase or
lease real property. As provided under Commissioner’s Regulation 2832, a deposit check may be held uncashed
by the broker until acceptance of the offer if the following conditions are met:

1. the check by its terms is not negotiable by the broker, or the offeror has given written instructions that the
check shall not be deposited or cashed until acceptance of the offer; and

2. the offeree is informed, before or at the time the offer is presented for acceptance, that the check is being
held.

If the offer is later accepted, the broker may continue to hold the check undeposited only if the broker receives
written authorization from the offeree to do so. Otherwise, the check must be placed, not later than three
business days after acceptance, into a neutral escrow depository or into the trust fund bank account or into the
hands of the offeree if both the offeror and offeree expressly so provide in writing.

According to Business and Professions Code Section 10145, a real estate salesperson who accepts trust funds on
behalf of the broker under whom he or she is licensed must immediately deliver the funds to the broker or, if
directed to do so by the broker, place the funds into the hands of the broker’s principal or into a neutral escrow
depository or deposit the funds into the broker’s trust fund bank account.

A neutral escrow depository, as used in Business and Professions Code Section 10145, means an escrow
business conducted by a person licensed under Division 6 (commencing with Section 17000) of the Financial
Code or by any person described in subdivisions (a)(1) and (a)(3) of Section 17006 of the Financial Code.

Identifying the Owner(s) of Trust Funds

A broker must be able to identify who owns the trust funds and who is entitled to receive them, since these funds
can be disposed of only upon the authorization of that person. The person entitled to the funds may or may not
be the person who originally gave the funds to the broker or the salesperson. In some instances the party entitled
to the funds will change upon the occurrence of certain events in the transaction. For example, in a transaction
involving an offer to buy or lease real property or a business opportunity, the party entitled to the funds received
from the offeror (prospective buyer or lessor) will depend upon whether or not the offer has been accepted by
the offeree (seller or landlord).

Prior to the acceptance of the offer, the funds received from the offeror belong to that person and must be
handled according to his/her instructions. If the funds are deposited in a trust fund bank account, they must be
maintained there for the benefit of the offeror until acceptance of the offer. Or, as discussed in the previous
section, if the offeror wishes, his/her check may be held uncashed by the broker as long as he/she gives written
instructions to the broker to do so and the offeree is informed before or at the time the offer is presented for
acceptance that the check is being so held.

After acceptance of the offer, the funds shall be handled according to instructions from the offeror and the
offeree as follows:

• An offeror’s check held uncashed by the broker before acceptance of the offer may continue to be held
uncashed after acceptance of the offer, only upon written authorization from the offeree. [Commissioner’s
Regulation 2832(d)]

• The offeror’s check may be given to the offeree only if the offeror and offeree expressly so provide in
writing. [Commissioner’s Regulation 2832(d)]

• All or part of an offeror’s purchase money deposit in a real estate sales transaction shall not be refunded by
an agent or subagent of the seller without the express written permission of the offeree to make the refund.

INTRODUCTION

Real estate brokers and salespersons receive trust funds in the normal course of doing business. They receive
these funds on behalf of others, thereby creating a fiduciary responsibility to the funds’ owners. Brokers and
salespersons must handle, control and account for these trust funds according to established legal standards.
While compliance with these standards may not necessarily have a direct bearing on the financial success of a
real estate business, non-compliance can result in unfavorable business consequences. Improper handling of
trust funds is cause for revocation or suspension of a real estate license, not to mention the possibility of being
held financially liable for damages incurred by clients.

This chapter discusses the legal requirements for receiving and handling trust funds in real estate transactions as
set forth in the Real Estate Law and the Regulations of the Real Estate Commissioner. It describes the requisites
for maintaining a trust fund bank account and the precautions a licensee should take to ensure the integrity of the
account. It explains and illustrates the trust fund record keeping requirements under the Business and
Professions Code and the Commissioner’s Regulations.

The discussions and examples in this chapter involve real property sales and property management trust account
transactions. Other types of real estate activities involving trust funds, although subject to the same laws and
regulations, may also have to comply with additional legal and regulatory requirements. While these other types
of transactions may require records significantly different from those illustrated, the record keeping
fundamentals still apply.

OTHER ACCOUNTING SYSTEMS AND RECORDS

A broker may use trust fund records not in the columnar form as prescribed by Commissioner’s Regulations
2831 and 2831.1. Such records must be in accordance with generally accepted accounting principles and must
include detail specified in subdivision (a) of these Regulations and be in a format that will readily enable
tracing and reconciliation in accordance with Section 2831.2. Whether prepared manually or by computer, they
must include at least the following:

1. A journal to record in chronological sequence the details of all trust fund transactions.

2. A cash ledger to show the bank balance as affected by the transactions recorded in the journal. The ledger
is posted in the form of debits and credits. (In some cases the cash ledger may be combined with the
journal.)

3. A beneficiary ledger for each of the beneficiary accounts to show in chronological sequence the
transactions affecting each beneficiary’s account, as well as the balance of the account.

To comply with generally accepted accounting principles, there must be one set of journal, cash ledger, and
beneficiary ledger for each trust fund bank account.

Journal

A journal is a daily chronological record of trust fund receipts and disbursements. A single journal may be used
to record both the receipts and the disbursements, or a separate journal may be used for each. To meet minimum
record keeping requirements, a journal must:

1. Record all trust fund transactions in chronological sequence.

2. Contain sufficient information to identify the transaction such as the date, amount received or disbursed,
name of or reference to payee or payor, check number or reference to another source document of the
transaction, and identification of the beneficiary account affected by the transaction.

3. Correlate with the ledgers. For example, it should show the same figures that are posted, individually or in
total, in the cash ledger and in the beneficiary ledgers. The details in the journal must be the basis for
posting transactions on the ledgers and arriving at the account balances.

4. Show the total receipts and total disbursements regularly, at least once a month.

Cash Ledger

The cash ledger shows, usually in summary form, the periodic increases and decreases (debits and credits) in the
trust fund bank account and the resulting account balance. It can be incorporated into the journal or it can be a
separate record, for example a general ledger account. If a separate record is used, the postings must be based on
the transactions recorded in the journal. The amounts posted on the ledger must be those shown in the journal.

Beneficiary Ledger

A separate beneficiary ledger must be maintained for each beneficiary or transaction or series of transactions.
This ledger shows in chronological sequence the details of all receipts and disbursements related to the
beneficiary’s account, and the resulting account balance. It reflects the broker’s liability to a particular
beneficiary. Entries in all these ledgers must be based on entries recorded in the journal.

QUESTIONS AND ANSWERS REGARDING TRUST FUND REQUIREMENTS AND RECORD KEEPING

Q. Are security deposits on rental units the property of the owner or should they be held in trust by the broker
for the tenant?

A. They are trust funds. As such, control and disbursement of the security deposits are at the instruction of the
property owner.

Q. Am I permitted to wait until checks deposited to my trust account have cleared before I issue a trust check
to fund a customer’s check?

A. Although the Real Estate Law is silent on this, good business practice dictates that you wait until a
customer’s check deposited to your trust account has cleared prior to the issuing of your trust check as a
refund.

Q. How should I handle an earnest money check which is to be deposited into escrow upon acceptance of the
offer?

A. Such a check may be held until the offer is accepted and then placed in escrow but only when directed to
do so by the buyer, provided you disclose to the seller the fact the check is being held in uncashed form. In
such cases, it is good practice to include such a provision in the deposit receipt. You must keep a columnar
record of the receipt of the check, the name of the escrow company and the date the check was forwarded
to the escrow.

Q. As a broker-owner of rentals, do I have to put security deposits in a trust account?

A. Money you receive on your own property is received as a principal, not as an agent. As such, these are not
trust funds and should not be placed in the trust account.

Q. Must I keep a deposit receipt signed only by the buyer and rejected by the seller?

A. Yes. Such a record must be maintained for three years.

Q. May I maintain one trust fund account for both collections from my property management business and
deposits on real estate sales transactions?

A. Since property management funds usually involve multiple receipt of funds and several monthly
disbursements, it is suggested that separate trust fund accounts be maintained for property management
funds and earnest money deposits. However, all trust funds can be placed in the same trust fund account as
long as separate records for each trust fund deposit and disbursement are maintained properly and the
account is not an interest-bearing account.

Q. If the buyer and seller decide to go directly to escrow and the buyer makes out a check to the escrow
company and hands it directly to the escrow clerk, do I have to maintain any records of this check?

A. No. You must maintain records only of trust funds which pass through your hands for the benefit of a third
party.

Q. How long must I keep deposit receipts?

A. Deposit receipts must be maintained for three years.

RECONCILIATION OF ACCOUNTING RECORDS

Purpose

The trust fund bank account record, the separate beneficiary or transaction record, and the bank statement are all
interrelated. Any entry made on the bank account record must have a corresponding entry on a separate
beneficiary record. By the same token, any entry or transaction shown on the bank statement must be reflected
on the bank account record. This applies to columnar as well as to other types of records.

The accuracy of the records is verified by reconciling them at least once a month. Reconciliation is the process
of comparing two or more sets of records to determine whether their balances agree. It will disclose whether the
records are completed accurately.

For trust fund record keeping purposes, two reconciliations must be made at the end of each month:

1. reconciliation of the bank account record (RE 4522) with the bank statement; and,

2. reconciliation of the bank account record (RE 4522) with the separate beneficiary or transaction records
(RE 4523).

Reconciling the Bank Account Record With the Bank Statement

The reconciliation of the bank account record with the bank statement will disclose any recording errors by the
broker or by the bank. If the balance on the bank account record agrees with the bank statement balance as
adjusted for outstanding checks, deposits in transit, and other transactions not yet included in the bank statement,
there is more assurance that the balance on the bank account record is correct. Although this reconciliation is not
required by the Real Estate Law or the Commissioner’s Regulations, it is an essential part of any good
accounting system.

Reconciling the Bank Account Record With the Separate Beneficiary or Transaction Records

This reconciliation, which is required by Commissioner’s Regulation 2831.2, will substantiate that all
transactions entered on the bank account record were posted on the separate beneficiary or transaction records.
The balance on the bank account record should equal the total of all beneficiary record balances. Any difference
should be located and the records corrected to reflect the correct bank and liabilities balances. Commissioner’s
Regulation 2831.2 requires that this reconciliation process be performed monthly except in those months when
there is no activity in the trust fund bank account, and that a record of each reconciliation be maintained. This
record should identify the bank account name and number, the date of the reconciliation, the account number or
name of the principals or beneficiaries or transactions, and the trust fund liabilities of the broker to each of the
principals, beneficiaries or transactions.

Unexplained Trust Account Overages

When a broker performs a reconciliation pursuant to Commissioner’s Regulation 2831.2, the broker may find an
unexplained overage. An unexplained overage is defined as funds in a real estate broker’s trust account which
exceed the aggregate trust fund liability of such account where the broker is unable to determine the ownership
of such excess funds.

Unexplained trust account overages are trust funds and unless the broker can establish the ownership of such
funds, the funds must be maintained in the broker’s trust fund account or in a separate trust fund account
established to hold such funds.

Unexplained trust account overages may not be used to offset or cover shortages that may exist otherwise in the
broker’s trust account.

A broker must keep a separate record of unexplained trust account overages including a separate subsidiary
ledger to record the potential trust fund liability. Such records must include the date of recording and the date on
which such funds became an unexplained trust account overage. A broker holding unexplained trust account
overages must perform a monthly reconciliation of such funds in accordance with Commissioner’s Regulation
2831.2.

Suggestions for Reconciling Records

The following is a general discussion on how to perform the trust account reconciliations.

1. Before performing the reconciliations, record all transactions up to the cut-off date in both the bank account
record and the separate beneficiary or transaction records.

2. Use balances as of the same cut-off date for the two records and the bank statement.

3. For the bank account reconciliation, calculate the adjusted bank balance from the bank statement and from
the bank account record. (Brokers commonly err by calculating the adjusted bank balance based solely on
the bank statement, ignoring the bank account record. While they may know the correct account balances,
they may not realize their records are incomplete or erroneous.)

4. Keep a record of the two reconciliations performed at the end of each month, along with the supporting
schedules.

5. Locate any difference between the three sets of accounting records. A difference can be caused by:

• not recording a transaction

• recording an incorrect figure

• erroneous calculations of entries used to arrive at account balances

• missing beneficiary records

• bank errors.

RECORDING PROCESS

Keeping complete and accurate trust fund records is easier when specific procedures are regularly followed. The
following procedures may be useful in developing a record keeping routine:

1. Record transactions daily in the trust fund bank account and in the separate beneficiary records.

2. Use consistently the same specific source documents as a basis for recording trust fund receipts and

disbursements. (For example, receipts pertaining to real estate resales will be recorded based on the Real
Estate Contract and Receipt for Deposit form, and disbursements will always be recorded based on the
checks issued from the trust account or debit notices from the bank.)

3. Calculate the account balances on all applicable records at the time entries are made.

4. Reconcile the records monthly to ascertain that transactions are properly recorded on both the bank account
record and the applicable subsidiary records.

5. Reconcile the trust records to the trust account bank statement on a monthly basis to ascertain that
amounts per the bank are in agreement with amounts per the trust fund records.

6. If more than one trust fund bank account is maintained, keep a different set of properly labeled columnar
records (cash record and beneficiary record) for each account.

SAMPLE TRANSACTIONS

To demonstrate the record keeping requirements discussed in this chapter, we have simulated trust account
records for typical real estate transactions occurring over a thirty-day period. To set the stage, let us assume that
James Adams, a real estate broker, owns and operates a one-man real estate office specializing in residential
sales and property management. Broker Adams has one trust fund bank account. We will look at the trust
account activity for this office for the month of May, 2010.

The use of columnar records to record these transactions is illustrated in Exhibits 1 - 10 at the end of this
chapter. As previously discussed, a broker may use other types of records as long as they meet generally
accepted accounting standards.

2010 TRANSACTIONS

May 1 Opened a trust account with First County Bank, and deposited $100 of his own money to cover bank

service charges.

May 1 Entered into agreements to manage the following rental properties:

Address Owner’s Name T. Eddie Number of Units 1
a. 1538 South Ave. Anycity, CA
b. 3490 Tower St. Anycity, CA L. Stewart 4
c. 9152 High Way Anycity, CA W. Allen 4
d. 2351-2353 Kingston Way Anycity, CA S. Manly 2
e. 7365 Meadow Cir. Anycity, CA J. Bird 1

May 3 Deposited the following rents received from tenants of managed properties:

Tenant’s Rent
Property Name Received
a. 1538 South Ave. B. Hamns $600
b. 3490 Tower St., Unit 1 R. Robertson 350
c. 2351 Kingston Way I. Warren 450

$1,400

May 5 Received a $2,000 check payable to broker from Mr. and Mrs. Dennis White as deposit for their

offer to buy a house at 615 Lake Drive, Anycity, owned by Mr. and Mrs. Richard J. Jensen. Buyers’
offer instructed broker to hold the check uncashed until their offer was accepted by the Jensens.

May 5 Received and deposited $750 from T. Sundance representing rent of $500 for May 5 to 30, and

$250 security deposits for 7365 Meadow Circle.

May 5 Was notified by the Jensens that they accepted the offer on their property.

May 6 Deposited the $2,000 check from Mr. and Mrs. White.

May 8 Obtained an exclusive listing to sell a six-plex at 915 Galaxy St., Anycity, owned by R. Jays.

May 9 Received $1,000 from W. Allen, owner of 9152 High Way, to cover anticipated expenses for the

property. Amount was deposited the same day.

May 10 Issued the following checks to pay for various expenses connected with the managed properties
Check No. Payee Purpose Amount
1001 ABC Mortgage Co. Mortgage payment for 1538 South Ave. $450
1002 Anycity Treasury Utilities for 1538 South Ave. 35
1003 Professional Cleaning for 3490 55
Cleaners Tower St.
1004 Mr. Handyman Minor repairs on 2351 Kingston 25
TOTAL $565

May 14 Received a $4,000 check from B. Sun, payable to Title Escrow Company, with an offer to buy the
915 Galaxy property.

May 15 Received R. Jays’ acceptance of the buyer’s offer on 915 Galaxy Street.

May 16 Delivered the $4,000 check from B. Sun to Title Escrow Company.

May 19 Issued check number 1005 for $2,000 to First Title Co. for account of Mr. and Mrs. White, buyers

of the 615 Lake Drive property.

May 22 Received an offer and a $3,000 check as deposit from R. Olive to buy a single family house at
31009 Technology Street owned by T. Evans.

May 24 Returned R. Olive’s check after seller rejected the offer.

May 31 Charged property management fees to the following accounts and issued check number 1006 for

$330 payable to himself:

Property Owner Management Fee
T. Eddie $45
L. Stewart 100
W. Allen 80

S. Manly 60
J. Bird 45
Total $330

May 31 Sent statement of account to each owner of the managed properties.

Background Information

James Adams keeps four types of columnar records:

1. Record of all Trust Funds Received and Paid Out - Trust Fund Bank Account (hereinafter referred to as
“Bank Account Record”). This record is required under Commissioner’s Regulation 2831 for each trust
account a broker has.

2. Record of all Trust Funds Received - Not Placed in Broker’s Trust Account (hereinafter referred to as
“Record of Undeposited Receipts”). This is required under Commissioner’s Regulation 2831.

3. Separate Record For Each Beneficiary or Transaction (hereinafter referred to as “Separate Beneficiary
Record”). This is required under Commissioner’s Regulation 2831.1.

4. Separate Record For Each Property Managed (hereinafter referred to as “Separate Property Record”).
This serves the same purpose as the Separate Beneficiary Record.

To illustrate the recording process, listed below are the entries made on the books by James Adams as well as
the documents prepared or obtained as support for each transaction. The actual entries are shown on the
forms/exhibits at the end of this chapter.

Note that:

• Each entry to any record shows all the pertinent information of the transaction, such as the date, name
of payee, name of payor, amount, check number, etc.

• The daily bank balance is computed and posted on the Account Record after recording the
transactions.

• The balance owing to the client is computed and posted on the Beneficiary Record or Separate Property
Record, after posting transactions.

• Any entry made on the Bank Account Record has a corresponding entry on a Beneficiary Record or a
Separate Property Record, and vice versa.

• All records except the Record of Undeposited Receipts show entries in chronological sequence
regardless of transaction type. The Record of Undeposited Receipts shows the disposition of a trust
fund in the same line as the receipt is entered, rather than in chronological sequence.

Step-By-Step Narrative of Trust Account Entries

(Actual recording shown on Exhibits 1 - 10 at end of chapter.)

Transaction Date May 1 Documentation Deposit slip prepared by broker. Entries Record the deposit on: 1. The Bank Account Record. Balance is $100. (Exh. 1) 2. A newly prepared Separate Beneficiary for James Adams. Balance is $100. (Exh. 2)
May 1 May 3 Management agreements signed by property owners and broker. Collection receipts Nos. 2, 3 and 4 issued to B. Hamns, R. Robertson, and I. Warren, respectively. No entries needed since there was no receipt nor disbursement of trust funds. Record the $1,400 receipt on: 1. The Bank Account Record. New balance is $1,500. (Exh. 1) 2. Newly prepared Separate Beneficiary Records for: T. Eddie - balance is $600 (Exh. 4) L. Stewart – bal. is $350 (Exh. 5) S. Manly - balance is $450 (Exh. 6)
May 5 Real Estate Purchase Contract and Receipt for Deposit signed by Mr. and Mrs. White. Collection receipt No. 1 issued to the Whites. Enter transaction on the Record of Undeposited Receipts. (Exh. 3) No Separate Beneficiary Record is necessary since the check was not deposited.

May 5 Collection receipt No. 5

issued to T. Sundance.
Receipt showed that
$500 of the $750 was
for rent and the other
$250 was for security
deposit.

May 5 Real Estate Contract

and Receipt for trust
funds were received for
Deposit signed by Mr.
and Mrs. Jensen.

Record the $750 deposit on:

1. The Bank Account Record. (Exh.

1)

2. Separate Beneficiary Records for:

J. Bird - Sundance’s Security

Deposit, bal. is $250. (Exh. 7)

J. Bird - balance is $500. (Exh. 8)
(Since security deposits will be
accounted to the tenant in the future,
James Adams keeps a separate record
for deposits. Total liability to the
owner is the sum of the two records -
one for security deposits, another for
rents and other transactions.)

No entries were made since no trust
funds were received or disbursed.

Transaction

Date

May 6

Documentation

Deposit receipt
prepared by broker.

Entries

Record $2,000 deposit on:

1. Bank Account record. New balance

is $4,250. (Exh. 1)

2. A newly prepared Separate
Beneficiary Record - Mr. and Mrs.
White/Mr. and Mrs. Jensen.

Account balance is $2,000. (Exh. 9)

3. Record of Undeposited Receipts.
(Exh. 3) Shows disposition of
check previously entered on the
record.

May 8 Exclusive Listing

Agreement signed by
sellers and broker.

May 9 Collection receipt No. 6

issued to W. Allen.

May 10 Checks issued by

broker. Supporting
papers for each check.

May 14 Real Estate Purchase

Contract and Receipt
for Deposit signed by
B. Sun.

May 15 Real Estate Purchase

Contract and Receipt
for Deposit signed by
R. Jays.

May 16 Receipt issued by Title

Escrow Company.

Record receipt on:

1. The Bank Account Record. New
balance is $5,250. (Exh. 1)

2. A newly prepared Separate
Beneficiary Record - W. Allen.

Balance is $1,000. (Exh. 10)

Record disbursements on:

1. Bank Account Record. New

Balance is $4,685. (Exh. 1)

2. Separate Beneficiary Records for:
T. Eddie - New balance is $115.

(Exh. 4)

L. Stewart - New balance is $295.

(Exh. 5)

S. Manly - New balance is $425.

(Exh. 6)

Record receipt on the Record of

Undeposited Receipts. (Exh. 3)

No entry was needed since there was
no receipt or disbursement of funds.

Note disposition of check on the
Record of Undeposited Receipts.

(Exh. 3)

Transaction Date May 19 Documentation Entries Check issued by broker. Record disbursements on the: Receipt issued by First 1. Bank Account Record. New balance Title Company. is $2,685. (Exh. 1) 2. Separate Beneficiary Record - Mr. and Mrs. White/Mr. and Mrs. Jensen. New balance is $0. (Exh. 9)
May 22 Real Estate Purchase Contract and receipt for Deposit signed by R. Olive.
May 24 Real Estate Purchase Post the return of check on the Record Contract and Receipt of Undeposited Receipts. (Exh. 3) for Deposit rejected by T. Evans.
May 31 List showing the Record disbursements on the: breakdown of the check 1. Bank Account Record. New balance amount, showing the is $2,685. (Exh. 1) charge to each owner. 2. Separate Beneficiary Records for: New Owners Balance T. Eddie $70 L. Stewart $195 (NOTE: A list is W. Allen $920 necessary as support for S. Manly $365 a check disbursement J. Bird $455 chargeable to a number of beneficiaries. Posting the entries on the separate records without such a list is not sufficient.)

After recording the daily transactions, the next step in the trust fund accounting process is the reconciling of
records at the end of the month. James Adams prepared reconciliation schedules by comparing the bank balance
on the Bank Account Record with the bank statement balance (the bank reconciliation) and also with the total of
the Separate Beneficiary Records balances (the reconciliation report).

The bank statement and reconciliations are shown on the next two pages.

FIRST COUNTY BANK STATEMENT.

MAIN BRANCH.

5 Main Avenue

ANYCITY, CA 90002.

PAGE 1 of 1.

DATE OF THIS STATEMENT 05/31/10.

JAMES ADAMS.

TRUST ACCOUNT.

8310 ORANGE AVENUE.

ANYCITY, CA 90002.

CHECKING ACCT. 123456 CUSTOMER SINCE 1995.

SUMMARY: PREVIOUS STATEMENT BALANCE ON 04/30/10 . 00.00

TOTAL OF 5 DEPOSITS FOR....................... 5,250.00

TOTAL OF 4 CHECKS FOR......................... 2,540.00

TOTAL OF 1 OTHER DEBIT FOR........................ 7.00

STATEMENT BALANCE ON 05/31/10 ................ 2,703.00

CHECKS/ CHECKS.

OTHER CHECK DATE.
DEBITS NUMBER POSTED AMOUNT.
1001 5/14 450.00
1002 5/16 35.00
1003 5/16 55.00
1005 5/21 2,000.00

OTHER DEBITS.

DATE POSTED .
05/31 SERVICE CHARGE AMOUNT 7.00
DEPOSITS/ OTHER DEPOSITS DATE .
CREDITS POSTED AMOUNT.
5/1 100.00
5/5 1,400.00
5/5 750.00
5/6 2,000.00
5/9 1,000.00

DAILY .
BALANCE DATE AMOUNT DATE AMOUNT.
5/1 100.00 5/14 4,800.00
5/5 2,250.00 5/16 4,710.00
5/6 4,250.00 5/21 2,710.00
5/9 5,250.00 5/31 2,703.00

James Adams
Bank Reconciliation
First County Bank
May 31, 2010

Balance per bank statement, 5/31/10 .................................... $2,703.00

Add deposits in transit ...................................................... -0-

Less outstanding checks:
check #1004...................................... $25.00

#1006 ................................................. 330.00

Adjusted bank balance, 5/31/10.......................................... $2,348.00

Balance per books, 5/31/10.............................................. $2,355.00

Less May bank service charge ..............................................

Adjusted balance, 5/31/10............................................... $2,348.00

James Adams
Reconciliation Report
First County Bank
Account No. 123456
May 31, 2010

Beneficiary Balance

James Adams (Broker)...................................................... $93.00

W. Allen.................................................................. 920.00

J. Bird .................................................................. 250.00

J. Bird .................................................................. 455.00

T. Eddie .................................................................. 70.00

S. Manly.................................................................. 365.00

L. Stewart................................................................ 195.00

Total per subsidiary records......................................... $2,348.00

(Agrees with bank account record balance.)

SEPARATE RECORD FOR EACH BENEFICIARY OR TRANSACTION
___________________FOR CLIENT'S FUNDS PLACED IN TRUST FUND BANK ACCOUNT

Identification Of Transaction (names, addresses,, account numbers, etc.)

James A. Adams

Trust Fund Balance - Broker

Description Discharge Of Trust Accountability For Funds Paid Out Trust Accountability F or F unds Received Account Balance
Date of Check Check Number Amount Date of Deposit Amount
Open TA Account 5-1-10 100.00 100.00
May '10 Bank Service Charge 5-31-10 SM 7.00 93.00





















EXHIBIT 2.

RE 4523 I Rev. 5/10)

RECORD OF ALL TRUST FUNDS RECEIVED — NOT PLACED IN BROKERS TRUST ACCOUNT
(Include Notes and Uncashed Checks Taken As Deposits)

RE 4524 (Rev. 5/10) EXHIBIT 3

SEPARATE RECORD FOR EACH PROPERTY MANAGED.


RE 4525 (Rev. 5/10) EXHIBIT 4

SEPARATE RECORD FOR EACH PROPERTY MANAGED.


RE 4525 (Rev. 5/10) EXHIBIT 5

SEPARATE RECORD FOR EACH PROPERTY MANAGED.

RE 4525 (Rev. 5/10) EXHIBIT 6

SEPARATE RECORD FOR EACH PROPERTY MANAGED.

RE 4525 (Rev. 5/10) EXHIBIT 7

SEPARATE RECORD FOR EACH PROPERTY MANAGED.

RE 4525 (Rev. 5/10) EXHIBIT 8

SEPARATE RECORD FOR EACH BENEFICIARY OR TRANSACTION.
FOR CLIENT'S FUNDS PLACED IN TRUST FUND BANK ACCOUNT.

Identification of Transaction (names, addresses, account numbers, etc.)

Mr. & Mrs. Whte/Mr. & Mrs. Jensen

RE: 615 Lake Drive, Anycity

Description Discharge Of Trust Accountability For Funds Paid Out Trust Accountability For Funds Received Account Balance
Date of Check Check Number Amount Date of Deposit Amount
Purchase Deposit 5-6-10 2.000.00 2,000.00
Deposit to Title Co. 5-19-10 1005 2.000.00 -0-










RE 4523, (Rev. 05/10) EXHIBIT 9

SEPARATE RECORD FOR EACH PROPERTY MANAGED.

RE 4525 (Rev. 05/10) EXHIBIT 10

SUMMARY

We might say this chapter presents the three R's of trust funds: Responsibility, Requirements, and Records.

It is a real estate broker’s responsibility to protect clients’ funds at all times and keep clients fully informed of
the nature and disposition of all trust funds.

To aid brokers in carrying out this responsibility, the Real Estate Commissioner’s Regulations include
requirements concerning trust funds. A real estate broker also needs to meet other requirements from a practical
business point of view. To protect clients’ funds adequately and in the business-like fashion expected, the broker
must keep accurate records.

RE 4522 (Rev. 5/10) EXHIBIT 1

TRUST FUND BANK ACCOUNTS

General Requirements

Trust funds, such as a purchase money deposit check, received by a licensee that are not forwarded directly to
the broker’s principal or to a neutral escrow depository or for which the broker does not have authorization to
hold uncashed must be deposited to the broker’s trust fund bank account. (Business and Professions Code
Section 10145)

Business and Professions Code Section 10145 and Commissioner’s Regulation 2832 require that a trust account
meet the following criteria:

1. designated as a trust account in the name of the broker as trustee;

2. maintained with a bank or recognized depository located in California; and

3. not an interest-bearing account for which prior written notice can, by law or regulation, be required by the
financial institution as a condition to withdrawal (except as noted in the discussion below of “Interest-
Bearing Accounts”).

A broker may have an out-of-state trust account if the account is insured by the Federal Deposit Insurance
Corporation (FDIC) and is used to service first loans for the types of note owners/investors specified in Section
10145(a)(2) of the Business and Professions Code.

Trust Account Withdrawals

According to Commissioner’s Regulation 2834, withdrawals from the trust account may be made only upon the
signature of one or more of the following:

1. the broker in whose name the account is maintained;

2. the designated broker-officer if the account is in the name of a corporate broker;

3. if specifically authorized in writing by the broker, a salesperson licensed to the broker; or

4. if specifically authorized in writing by the broker who is a signatory of the trust account, an unlicensed

employee of the broker covered by a fidelity bond at least equal to the maximum amount of trust funds to
which the employee has access at any time.

No arrangement under which a person named in items 3 or 4 is authorized to make withdrawals from a broker’s
trust fund relieves an individual broker or the broker-officer of a corporate broker licensee from responsibility or
liability as provided by law in handling trust funds in the broker’s custody.

Interest-Bearing Accounts

A trust fund bank account normally may not be interest-bearing. A broker may, however, at the request of the
owner of trust funds, or of the principals to a transaction or series of transactions from whom the broker has
received trust funds, deposit the funds into an interest-bearing account in a bank or savings and loan association
if all of the following requirements of Business and Professions Code Section 10145(d) are met:

1. The account is in the name of the broker as trustee for a specified beneficiary or specified principal of a
transaction or series of transactions.

2. All of the funds in the account are covered by insurance provided by an agency of the federal government.

3. The funds in the account are kept separate, distinct, and apart from funds belonging to the broker or to any
other person for whom the broker holds funds in trust.

4. The broker discloses the following information to the person from whom the trust funds are received and to
any beneficiary whose identity is known to the broker at the time of establishing the account:

• the nature of the account;

• how the interest will be calculated and paid under various circumstances;

• whether service charges will be paid to the depository and by whom; and

• possible notice requirements or penalties for withdrawal of funds from the account.

5. No interest earned on funds in the account shall inure directly or indirectly to the benefit of the broker or to
any person licensed to the broker, even if the funds’ owners would permit such an arrangement.

6. In an executory sale, lease, or loan transaction in which the broker accepts funds in trust to be applied to the
purchase, lease, or loan, the parties to the contract shall have specified in the contract or by collateral
written agreement the person to whom interest earned on the funds is to be paid or credited.

The only other situation where a real estate broker is allowed to deposit trust funds into an interest-bearing
account occurs when the broker is acting as an agent for a financial institution which is the beneficiary of a loan.
In this case the broker may, pursuant to Commissioner’s Regulation 2830.1, deposit and maintain funds received
from or for the account of an obligor (borrower) into an interest-bearing trust account in a bank or savings and
loan association in order to pay interest on an impound account to the obligor in accordance with Section 2954.8
of the Civil Code, as long as the following requirements are met:

1. The funds received from or for the account of the obligor are for the future payment of property taxes,
assessments or insurance relating only to a property containing a one-to-four family residence.

2. The account is in the name of the broker as trustee.

3. All of the funds in the account are covered by insurance provided by an agency of the federal government.

4. All of the funds in the account are funds held in trust by the broker for others.

5. The broker discloses to the obligor how interest will be calculated and paid.

6. No interest earned on the trust funds shall inure directly or indirectly to the benefit of the broker or to any
person licensed to the broker.

Commingling Prohibited

Funds belonging to a licensee may not be commingled with trust funds. Commingling is strictly prohibited by
the Real Estate Law. It is grounds for the revocation or suspension of a real estate license pursuant to Business
and Professions Code Section 10176(e).

Commingling occurs when:

1. Personal or company funds are deposited into the trust fund bank account. Except for what is provided in
Section 2835 of the Commissioner’s Regulations as noted below, this is a violation of the law even if
separate records are kept.

2. Trust funds are deposited into the licensee’s general or personal bank account rather than into the trust fund
account. In this case the violation is not only commingling, but also handling trust funds contrary to
Business and Professions Code Section 10145. It is also grounds for suspension or revocation of a license
under Business and Professions Code Section 10177(d).

3. Commissions, fees, or other income earned by the broker and collectible from the trust account are left in
the trust account for more than 25 days from the date they were earned.

A common example of commingling is depositing rents and security deposits on broker-owned properties into
the trust account. As these funds relate to the broker’s properties, they are not trust funds and, therefore, may not
be deposited into the trust fund bank account. Likewise, the broker may not make mortgage payments and other
payments on broker-owned properties from the trust account even if the broker reimburses the account for such
payments. Conducting personal business through the trust account is strictly prohibited and is a violation of the
Real Estate Law.

Commissioner’s Regulation 2835 provides that the following situations do not constitute “commingling” for
purposes of Business and Professions Code Section 10176(e):

(a) The deposit into a trust account of reasonably sufficient funds, not to exceed $200, to pay service charges or
fees levied or assessed against the account by the bank or financial institution where the account is
maintained.

(b) The deposit into a trust account maintained in compliance with item (d) below of funds belonging in part to
the broker’s principal and in part to the broker when it is not reasonably practicable to separate such funds,
provided the part of the funds belonging to the broker is disbursed not later than 25 days after the deposit
and there is no dispute between the broker and the broker’s principal as to the broker’s portion of the funds.
When the right of a broker to receive a portion of trust funds is disputed by the broker’s principal, the
disputed portion shall not be withdrawn until the dispute is settled.

(c) The deposit into a trust account of broker-owned funds in connection with mortgage loan activities as
defined in subdivision (d) or (e) of Section 10131 of the Business and Professions Code or when making,
collecting payments on, or servicing a loan which is subject to the provisions of Section 10240 of the
Business and Professions Code provided:

(1) The broker meets the criteria of Section 10232 of the Business and Professions Code.

(2) All funds in the account which are owned by the broker are identified at all times in a separate record
which is distinct from any separate record maintained for a beneficiary.

(3) All broker-owned funds deposited into the account are disbursed from the account not later than 25
days after their deposit.

(4) The funds are deposited and maintained in compliance with item (d) below.

(5) For this purpose, a broker shall be deemed to be subject to the provisions of Section 10240 of the
Business and Professions Code if the broker delivers the statement to the borrower required by Section
10240.

(d) The trust fund account into which the funds are deposited is maintained in accordance with the provisions of
Section 10145 of the Business and Professions Code and the Commissioner’s Regulations..

To summarize, a real estate broker’s personal funds may be in the trust account in the following two specific
instances:

1. Up to $200 to cover checking account service fees and other bank charges such as check printing charges
and service fees on returned checks. Trust funds may not be used to pay for these expenses. (The preferred
practice, however, is for the broker to have the bank debit his/her own personal account for any trust
account fees and charges.)

2. Commissions, fees, and other income earned by a broker and collectible from trust funds may remain in the
trust account for a period not to exceed 25 days. Regulation 2835 recognizes that it may not always be
practical to disburse the earned income immediately upon receipt. For instance, a property management
company may find it too burdensome to collect its management fee every time a rent check is received and
deposited to the trust account. Therefore, as long as the broker disburses the fee from the trust account
within 25 days after deposit there is no commingling violation. Note, however, that income earned shall not
be taken from trust funds received before depositing such funds into the trust bank account. Also, under no
circumstances may the broker pay personal obligations from the trust fund bank account even if such
payments are a draw against commissions or other income. The broker must issue a trust account check to
himself/herself for the total amount of the income earned, adequately documenting such payment, and then
pay personal obligations from the proceeds of that check.

Trust Fund Liability

Trust fund liability arises when funds are received from or for the benefit of a principal. The aggregate trust fund
liability at any one time for a trust account with multiple beneficiaries is equal to the total positive balances due
to all beneficiaries of the account at the time. Note that beneficiary accounts with negative balances are not
deducted from other accounts when calculating the aggregate trust fund liability.

Funds on deposit in the trust account must always equal the broker’s aggregate trust fund liability. If the trust
account balance is less than the total liability a trust fund shortage results. Such a shortage is in violation of
Commissioner’s Regulation 2832.1, which states that the written consent of every principal who is an owner of
the funds in the account shall be obtained by a real estate broker prior to each disbursement if such a
disbursement will reduce the balance of the funds in the account to an amount less than the existing aggregate
trust fund liability of the broker to all owners of the funds. Conversely, if the trust account balance is greater

than the total liability, there is a trust fund overage and the broker may be in violation of Business and
Professions Code Section 10176(e) for commingling.

A trust fund discrepancy of any kind is a serious violation of the Real Estate Law. Many real estate licenses have
been revoked after a DRE audit disclosed a trust account shortage. To ensure that the balance of the trust
account always equals the trust fund liabilities, a broker should implement the following procedures:

l. Deposit intact and in a timely manner to the trust account all funds that are not forwarded to escrow or to
the funds’ owner(s) or which are not held uncashed as authorized. This practice, required under
Commissioner’s Regulation 2832, lessens the risk of the funds being lost, misplaced, or otherwise not
deposited to the trust account. A licensee is accountable for all trust funds received whether or not they are
deposited. DRE auditors have seen numerous cases where trust funds received were properly recorded on
the books but were never deposited to the trust account.

2. Maintain adequate supporting papers for any disbursement from the trust account. Record the disbursement
accurately in both the Bank Account Record and the Separate Beneficiary Record. The broker must be able
to account for all disbursements of trust funds. Any unidentified disbursement will cause a shortage.

3. Disburse funds from a beneficiary’s account only when the disbursement will not result in a negative or
deficit balance (negative accountability) in the account. Many trust fund shortages are caused by
disbursements to a beneficiary in excess of funds received from or for account of that beneficiary. The
excess disbursements are, in effect, paid out of funds belonging to other beneficiaries. A shortage occurs
because the balance of the trust fund bank account, even if it is a positive balance, is less than the broker’s
liability to the other beneficiaries.

4. Ensure that a check deposited to the trust fund account has cleared before disbursing funds against that
check. This applies, for example, when a broker who has deposited an earnest money check for a purchase
transaction has to return the funds to the buyer because the offer is rejected by the seller. A trust fund
shortage will result if the broker issues the buyer a trust account check and the buyer’s deposit check
bounces or for some reason fails to clear the bank.

5. Keep accurate, current and complete records of the trust account and the separate record for each
beneficiary. These records are essential to ensure that disbursements are correct.

6. On a monthly basis, reconcile the cash record with the bank statement and with the separate record for each
beneficiary or transaction.

Summary - Maintaining Trust Account Integrity

In summary, to maintain the integrity of the trust fund bank account, a broker must ensure that:

1. his/her personal or general operating funds are not commingled with trust funds;

2. the balance of the trust fund account is equal to the broker’s trust fund liability to all owners of the funds;
and

3. the trust fund records are in an acceptable form and are current, complete and accurate.