How do I enter a house sale into my accounting package?

Question

We sold our house and purchased a new one. The money from the sale went into our lawyer's trust account, and then was passed onto the vendor that sold us the new house. In my accounting package, I have a Sales Invoice and a Purchases Invoice, and I need to credit one against the other. Where do I code those transactions that didn't go through my bank account? Should I just create a new account code, i.e. Lawyer's Trust Account?

Answer 1

Yes, creating a temporary Lawyer's Trust Account / Solicitor's Trust Account / Settlement Clearing Account is a sensible way to represent the flow of funds.

The important point is that the transactions really did occur even though the cash never entered your ordinary bank account. Your lawyer was holding and transferring the funds on your behalf.

For example, suppose:

1. old house sold for $300,000;
2. $300,000 goes to the lawyer's trust account;
3. the lawyer then applies that $300,000 toward the new house.

Conceptually, the entries would show:

Sale proceeds→Lawyer’s Trust/Clearing Account\text{Sale proceeds} \rightarrow \text{Lawyer's Trust/Clearing Account}

followed by

Lawyer’s Trust/Clearing Account→Purchase of new property.\text{Lawyer's Trust/Clearing Account} \rightarrow \text{Purchase of new property}.

If everything held by the lawyer is ultimately distributed, the trust/clearing account should return to zero after settlement.

This is preferable to pretending that the money passed through your checking account, because your accounting records can then be reconciled with both your actual bank statements and the lawyer's settlement statement.

However, I would be cautious about recording the transactions simply as a Sales Invoice and Purchases Invoice. If this is formal accounting rather than personal bookkeeping, the sale of a house is normally a disposal of an asset, not ordinary sales revenue, and purchasing the replacement house normally creates an asset rather than an ordinary expense. Mortgages, legal fees, commissions, taxes, accumulated depreciation (if applicable), and any gain or loss on disposal may also require separate entries.

The lawyer's final settlement/closing statement is therefore the best document from which to construct the entries.

So, yes: use a lawyer's trust or settlement clearing account to record money handled on your behalf outside your normal bank account. Debit and credit that account as the sale proceeds arrive and are subsequently applied, with the goal of reconciling it to zero after the transaction is complete. The exact entries for the properties themselves depend on whether this is personal bookkeeping or business/accounting records and on the applicable accounting and tax rules.