Fiduciary accounting means reporting the financial issue regarding income and expenses of a trust or about financial commodity under charge. Fiduciary accounting refers to accountability of an agent towards the principal. Being in fiduciary capacity means being faithful, honest and doing work for the interest and benefit of the principal. Honest agent will consider his/her owner`s interest more important than his own interest. In fiduciary accounting all these aspects of integrity towards the owner (principal) are considered.
An agent is trusted person who is given charge on owner`s capital, assets and income. This charge will be in many ways: agent taking care of owners property and income, he /she may be running a welfare trust whose funding is given by someone other than him/her, he/she may be in charge to take care of the financial assets of a deceased person or a minor child before he/she reaches to maturity age. To elaborate the functions of fiduciary accounting these roles must be understood which will give the idea about the requirement of this type of financial accounting. This is a way of communicating results of financial operations to funds given by owners, this report is to be made to owner/s or it can be require by court also. This is a mean of updating principal about the financial transactions made and investments policies, status of their return, cash flow etc.
Basic principals of fiduciary accounting are same as of normal accounting practice. Accuracy, completion and transparency are the rules to be followed while preparing reports in fiduciary accounting. This is scrutinized by International Reposting standard and also need to comply with legal/statutory requirements of courts.
The mechanism of fiduciary accounting is to record the principal amount of trust /funds, capital gains made are added to this principal amount while losses are deducted. Expenses and debts if incurred by the trust are also deducted from the principal amount.
In financial statement made under principle of fiduciary accounting, principal amount and income both are stated. Mean of income generation are dividends, interest received from investment made. Income is mentioned specifically in financial statements since the aim of every user will not be in income only.
Regarding business assets under charge of executor or agent, in case when asset or part of it is being sold, both the net book value and sale value has been shown. Disposal gains and losses are accounted for as capital gains and losses. Regarding income, receipt number and date is being mentioned in order, to make the user of financial statement see the evidence of the receipt.
Entries relating to expenses made to run and manage the trust are also recorded in financial statements to show their nature. Detail of payment made to beneficiaries is also recorded by showing the closing balance left after payment.
Basic rules that a fiduciary accountant should follow while preparing financial statement are: Basic purpose and aim of the trust or fund should be shown in start, to make user aware about the aim and interest of the fund.
All transactions showing results of financial administration of funds should be shown.
Format and language used for reporting the financial statement should be in a manner that is understandable by the user of this report.
Carrying values of assets should be mentioned in term of carrying value when asset was acquired and also carrying value at start and end of respective accounting period.
All gains and losses should be specifically shown, any income, expense or loss earned that was not through agent act should be shown separately in financial statements.