Getting started
Principles of estate accounting
Estate accounting is an accounting problem. Many attorneys and paralegals do the work without using accounting principles to their advantage. Four ideas make the work easier.
An estate is a business
An estate has the financial attributes of a business. It is a separate entity. It has assets, income, expenses, and sometimes liabilities. Like a business, it must track its transactions and use them to produce complete and accurate financial statements for the people with an interest in it.
An estate is a business that runs backwards
Most businesses start with nothing and grow. An estate starts with assets and ends with none, once everything has been paid out or distributed. That is why an estate may not look like a business at first, even though it is one.
An estate is a simple business
An estate has no employees, no payroll, no accounts payable, and no stock to count. It runs on a cash basis, so accrual rules do not apply. It rarely borrows money, and it often has no debt at all. Recording its transactions and producing its statements is much simpler than it is for an ordinary business.
Why double-entry bookkeeping still helps
Even a simple business benefits from double-entry books.
- You enter transactions one asset at a time, which makes them easy to enter correctly.
- Reports are generated from those transactions, which saves time and improves accuracy.
- Every account has to balance, so mistakes are easy to find and correct. This is the most important benefit.
You do not need a full grounding in financial accounting to do this well. It is enough to understand the principles that apply to an estate and how to enter a few kinds of transactions.
The four kinds of transactions
Every transaction must balance. An entry in one account is offset by an equal entry in another account. Accountants call these entries debits and credits. Estate Bookkeeper does not ask you to think in debits and credits. You pick the two accounts and an amount, and it records both sides.
Nearly everything that happens in an estate is one of four kinds of transactions.
- Opening balance. Records an account's value on the starting date, usually the date of death. It adds to the asset account and to equity. For a debt, such as the decedent's mortgage, it adds to the liability account and reduces equity.
- Income. Records money that came into the estate. It adds to the asset account that received the money and to the income account for that type of income.
- Expense. Records money the estate paid out. It reduces the asset account the money came from and adds to the expense account for that type of expense. Attorney fees, court fees, claims, and distributions to beneficiaries are all recorded as expenses.
- Transfer. Records money that moves from one account to another. Moving money from the decedent's checking account to the estate checking account reduces the first balance and adds to the second. A loan payoff works the same way. It reduces the asset account the money came from and reduces the liability account for the loan.
Each of these always balances, because the entry in one account offsets the entry in the other. As long as each transaction is entered as the right kind, the books stay in balance.