A fiduciary must separate the principal from the income. The principal is the sum originally acknowledged plus capital gains less capital losses and less any expenses or distributions declarable to principal. Income is the interest, dividends, and other incomes gained by the principal. The importance of keeping principal and the income separate is because in trusts and estates, the beneficiaries of income may be different from the beneficiaries of principal (Spencer, 2009). The Uniform Principal and Income Act (UPIA) gives the guidelines on how to determine whether an earning or disbursement is charged or allocated to income or principal.
The collection of estate or trust assets, the principal and income, payment of debts, the accounting of all of those transactions and the paperwork that accompany the process in distribution of an estate or trust are paralegal tasks better done by a lawyer. For fiduciary accounts to be produced possibly needed to be presented in a court, more time is needed to enter the accounting data in accounting software to process fiduciary accounts. After listing principal receipts, it is vital to prepare a schedule that shows sales or other forms of disposition.
A fiduciary carries the assets in the fiduciary account at ‘book value’ indicating the value of the asset when the fiduciary received the asset (Spencer, 2009). When the asset is sold, the fiduciary ought to indicate the difference between the sales price and the book value as a gain or loss. In preparing the fiduciary account, the fiduciary needs help. The carrying value or book value is ideally not same as the asset cost basis due to the implications of income tax treatment (Spencer, 2009).
In this case, the fiduciary’s gain or loss in the accounting treatment may differ with the capital gains realized for income tax purposes. The next vital matter is preparing a schedule of any items paid out chargeable on the principal which include distributions and expenses that are allocable to principal (Spencer, 2009). What follows is scheduling the principal balance on hand which indicates the remainder. The prudent format is scheduling both the book value and fair market value of the asset at the close of the accounting period (Spencer, 2009).
When the fiduciary account covers a long period, it may be challenging to determine the performance of the investment in terms of return on investment. Some transactions such as cash investments lack effect on the value of the assets being administered but the transactions ought to be reflected. Drawing a schedule of incomes is the next item. In fiduciary accounting, incomes are categorized according to type of income that includes rent, interest or dividends (Spencer, 2009).
The incomes ought to be listed according to the date of receipt for easy accounting and clarity. Payments allocable on incomes are the next item on schedule. The main payment items under incomes are the ordinary expenses together with distributed income to beneficiaries or principal. Fiduciary accounting objectives and standards In accounting, the most important objective is exposing essential and useful information in an understanding form to the parties interested in the accounting process.
The accounts should be simplistic in preparation which means unreasonable expenses to the fund are eliminated and undue distraction from the on-going administration of the estate (Siegel & Jae, 2000). The parties ought to understand the nature of accounting process and the need to protect their interests. This increases the relationship of trust and confidence between the fiduciary and the beneficiaries. The accounts must be presented in a partnership format that promotes the relationship.