Unlike a typical business accounting, Trusts and estates don’t have a profit and loss statement or a balance sheet. Instead, they use “Credits” and “Charges.” In the simplest of terms, they keep track of what goes in and what comes out.
For example, the Charges are the items that come into the Trust or estate (the things the fiduciary is “charged” with). They begin with the value of assets on-hand at the beginning of the accounting period. So if we were preparing a Trust accounting with a period that starts January 1, 2011, then we would need to provide a list of all the assets and their values as of that date. You then add in all the receipts that come into the Trust or estate (like income payments, interst, any positive cash flow), and gains on sale (which only applies if any capital assets are sold).
The Credits, on the other hand, is a list of the things that go out, such as disbursements (a fancy word for bills and expenses that are paid from the Trust or estate), distributions (money paid to beneficiaries), and losses on sale of capital assets (assuming any such assets were sold). Charges end with the balance of assets on hand at the END of the accounting period.
Every accounting has a summary sheet that gives the overall view of the accounting period, which will then have corresponding schedules follow, where the detailed information is listed.
The trick is that the total Charges (what comes in) must be equal to the total Credits (what goes out, including what’s left on hand). If they are not, then the accounting does not balance—something is missing and has to be tracked down.
Most fiduciaries that are handling court accountings are also required to be bonded by the court. The bond is an insurance policy that is paid by the trust or probate account that insures the money in the account is not used improperly. In the event that a fiduciary misuses the funds, the bond company will pay back the amount that was misused and then seek reimbursement from the fiduciary. The bond companies require that all fiduciaries in California have an Attorney represent them throughout this process.