What do you think when I say ‘Pink Form’? Where do you use it in the sales trust accounting process? Do you know what it is? It does not surprise us if you answer no. Many people are not aware of their obligations when opening Interest Bearing Deposit accounts or the records they need to maintain. This article will therefore help clear up any confusion when it comes to this process. It will also to help avoid receiving a breach on your next audit report.
Sales Trust Accounting
1. Congratulations! You’ve just sold a property and exchanged on a 10% deposit. Sometimes this can be a 5% deposit, but we will use 10% deposit as an example.
You need to provide the purchaser with a copy of receipt upon payment. Since this may be a deposit that you’ve taken at auction so you will have already issued them with a receipt from your manual receipt book. So be sure to deposit the funds into the sales trust account within 24-48 hours. If you have taken the deposit at a Saturday auction then banking the funds on Monday is appropriate. If Monday was a public holiday then make note of this on your deposit records. This will help if you are questioned by your auditor as to why funds were not banked within the prescribed time frame.
Enter the 10% deposit into the sales trust accounting system. This produces a trust receipt and records the deposit against the cashbook, ledgers and forms part of the trial balance, reconciliation etc.
If you are doing this using a manual paper system then you will need to record the deposit into the receipt side of the cashbook and the vendors ledger as a credit. Provide the purchaser with the original copy of the receipt and ensure that you keep the duplicates for the auditor in your manual receipt book.
2. You may need to open an interest bearing deposit account (IBD account) on advice from the solicitor at the bank. This is usually a physical process and each bank will have their own process to open this type of account.
One thing that many agents are unaware of at this point, is their obligation to complete the Pink Form. This document informs the bank under Section 90 of the PSBA 2002 that this account is exempt from interest being directed to Fair Trading. To obtain a copy of the pink form download here:
This form is required in duplicate and must be stamped by the authorised deposit taking institution. You should always retain a your copy of this form in your audit file for each IBD investment account that you open.
3. The Bank will transfer the initial deposit from the Sales Trust Account to the IBD account, you will need to replicate this in your trust accounting system (usually done by way of a journal from the main trust account to a sub account in an electronic system to mirror what the bank has done).
If you are doing this in a manual paper system then you will need to record the transfer to the IBD account as a payment, in the payment side of the cashbook and on the vendor’s ledger as a debit with a reference to note the opening of the investment account.
4. On settlement the IBD is closed at the bank and the funds are re-deposited into the sales trust with interest. Record the interest in the trust system via a receipt and record onto the receipt side of the cashbook and vendor’s ledger as a credit.
5. Disburse funds to the parties according to instructions on the ‘Order on the Agent’. This includes purchaser’s share of interest and agent’s commission, with the balance going to the vendor.
If you are disbursing in a manual system then you will need to record 3 payments into the payments side of the cashbook. Make the appropriate debit entries into the vendor’s ledger.
6. Provide each party with an itemised statement of account showing how the allocation of funds. This satisfies Section 101 of the PSBA 2002 by ‘providing each person in connection with a transaction an itemised account’.
Important Points to Be Noted Regarding Interest Bearing Accounts & Settlement Cheques
1. The definition of an IBD is not a trust account but rather a joint account. It is able to earn interest and has the tax file numbers of the purchaser and vendor attached to it.
2. To issue an official trust account you must receipt the 10% deposit into the sales trust.
3. If you enter the 10% sale deposit directly into the IBD account then you cannot issue a receipt. Rather you can provide a statement to both the vendor and purchaser showing the investment, interest made and how it was divided.
4. If you initially receipt the 10% into the sales trust before you open the IBD account, you must to disburse the funds from the sales trust account upon settlement. Not from the interest bearing account.
5. Finally, if the vendor’s solicitor requests a bank cheque on settlement (not a trust cheque) for the vendor’s settlement funds you can go to the bank and request a bank cheque with your next cheque number in the series. As a result, you meet the PSBA Regulations 2014 because the numbers will remain sequential in your trust accounting system.
So now, do you know what the Pink Form is? Are there some trust accounting ‘Best Practices’ you do in your office? We’d love your comments.
~ Jane Morgan is the Director of End of Month Angels, a consultancy firm specialising in Trust Accounting. She knows the legislation, and the requirements of running a successful Real Estate office because she practiced Real Estate herself for 15 years. Don’t trust just anyone with your trust accounting. Trust End of Month Angels and get back to what you do best – growing your business.