Start with legal ownership of the cash
Money in escrow is held under an agreement for a defined purpose. Depending on the arrangement, it may remain an asset of the company, represent money owed to another party, or be outside the company's balance sheet entirely.
Finance should read the escrow agreement rather than classify the bank movement from its memo.
Maintain an escrow roll-forward
Track opening balance, deposits, interest if any, fees, releases, deductions, counterparties, and ending balance. Link every movement to the escrow statement and the transaction it supports.
If the escrow agent provides periodic statements, reconcile them like another financial account.
Record releases according to their purpose
A release could settle a purchase price holdback, tax obligation, insurance claim, security deposit, debt requirement, or customer liability. The accounting entry depends on what the escrow was created to settle.
Do not treat every release as revenue simply because cash reaches the company's operating bank account.
Close the escrow record completely
When the arrangement ends, confirm the final statement, all releases, fees, interest, remaining balance, and closure evidence. Clear any corresponding receivable, payable, restricted-cash, or transaction account.
That final reconciliation prevents old escrow balances from surviving for years after the underlying deal ended.
Questions buyers usually ask
Is escrow cash always an asset of the business?
No. The accounting depends on the agreement, ownership, restrictions, and purpose of the escrow.
How should escrow be reconciled?
Use the escrow agent's statement and agreement to reconcile deposits, fees, releases, interest, deductions, and the ending balance.
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