LESSON FIVE

TRUST ACCOUNTS
5.0: INTRODUCTION

The main purpose of trust accounts is to demonstrate that the trust funds have been applied in
accordance with the trust instrument and to give details of transactions to trustees, beneficiaries and
other interested parties. The accounts should be as simple as possible for the benefit of trustees and
beneficiaries who are not trained in accounting. Trust accounts and supporting books and vouchers
should be kept for a longer period than would be the case with commercial documents.

5.1: LEARNING OBJECTIVES

By the end of this lesson you should be able;

 To identify the main accounts that have to be prepared by a trustee
 To appreciate the unique features of trust accounts
 To prepare the various trust accounts
 To prepare the trust statement of financial position

5.2: GENERAL OVERVIEW

The main Trust accounts that should be maintained include;

5.2.1: Trust cash book

This is recorded with all transactions pertaining to cash payments and cash receipts. Unlike the
basic cash book, the trust cash book has separate columns for income based activities and each
category of investments. Its general format is as follows;

Dat Particular Incom FI WR SR Dat Particular Incom FI WR SR

e s e e s e

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5.2.2: Trust Income Account
This is recorded with the amount of income earned in a given period from the respective
investments that have been made. It is also recorded with any expenses that have been incurred
in the process of generating the revenue.

5.2.3: Trust Capital Account

The balance on the capital account shows the total book value of the capital funds under each type
of investment fund. Its general format is as follows;

Dat Particular FI WR SR Dat Particular FI WR SR

e s e s

5.2.4: Beneficiaries Accumulation Accounts

When property is left in trust for minors, the income earned for the period will be divided equally
or according to the terms of the will or trust deed. These shares of income will be credited to the
accounts of the infant beneficiaries, usually called Income Accumulation Accounts. Any amounts
paid for maintenance either by the terms of the will or trust deed or under Section 33 of the Trustee
Act will be debited to the respective Income Accumulations Accounts. The income accumulations
must be invested from time to time and the investments earmarked as being on Accumulations
Account. The income arising on accumulation investments should be credited to Income
Accumulations Account and divided between the infants in proportion to the balances on
Accumulations Account at the commencement of the year. It will be appreciated from the above
that the Income Accumulations Account is merely an income account ruled with columns to
distinguish the income belonging to each beneficiary. The total balances on this account will be
represented by Accumulation Investments and cash at bank.

5.2.5: Life Tenants Accounts

These are prepared where the beneficiaries in a trust are life tenants to that trust. The accounts are
recorded with the amount of income that is distributed to each beneficiary.

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5.2.6: Trust Statement of Financial Position
This represents the financial position of the trust as at a particular date. Its general format is as
follows;
 
Fixed Interest investments Shs'000
(Detailed) xxxx
Cash at bank xxxx xxxx
 
Wider range investments
(Detailed) xxxx
Cash at bank xxxx xxxx
 
Special range investments
(Detailed) xxxx
 
Cash at bank
(Income) xxxx
xxxx
Estate Capital account
Fixed interest range xxxx
Wider range xxxx
Special range xxxx
xxxx
 
Estate Income account/Accumulation Accounts xx
xxxx

ILLUSTRATION
Kimaru and Majiwa are life tenants of a trust set up by their uncle. The trustees have investment
powers restricted to those contained in the Trustee Act (Chapter 167 of the Laws of Kenya)
except they could hold at their absolute discretion 300,000 shares of Sh.10 each in Kilimanjaro

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Enterprises Limited, a horticultural exporting company run by the uncle.. On 31 March 2016, the
balance sheet of the trust was as follows:

Sh.’000’ Sh.’000’
Fixed interest investments
Sh.2 million 10% Kenya stock 2021 (cost) 2,000
Sh.2 million 9% Kenya stock 2020 (cost) 1,800
Cash at bank 200 4,000
Wider range investments
40,000 shares of Sh.100 in E.A. Breweries 4,000
Ltd (cost)
Special range investments
300,000 shares in Kilimanjaro Enterprises 3,000
Ltd. (cost) 11,000

Trust capital
Fixed interest fund 4,000
Wider range fund 4,000
Special range fund 3,000
11,000

In the year to 31 March 2017, the following occurred:

2016
30 June Interest for the year ended 30 June 2016 was received on 10% Kenya
stock. School fees for Kimaru and Majiwa were paid immediately
using the whole amount received.

30 September A final dividend of 75% for the year ended 30 June 2016 was received
from E.A. Breweries Ltd. (payout rate 10%).

30 November The E.A. Breweries Ltd. shares were sold at Sh.110 each. At the same
time, a satisfactory buyer was found for the 300,000 shares in
Kilimanjaro Enterprises Limited – these shares were sold for Sh.15

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 each. Some high yielding 12%Kenya stock 2022 was available at par
on this date. It was decided to use all the wide range cash available to
purchase this stock and designate it as a wider range investment.

31 December Interest was received for the year on the 9% Kenya stock and Sh.42,
000 interest was received on the fixed interest cash at bank.

2017
28 February 61,250 Sh.10 ordinary shares in ICDI Limited were purchased for
Sh.40 per share using the fixed interest cash and a suitable switch was
made to ensure adherence to the requirements of the Trustee Act. The
market value of the 12% Kenya stock 2022 on this date was still par.

31 March All remaining income cash was paid across to the life tenants, after trust
administration expenses of Sh.120, 000 were paid for the year.
Required

(a) Write up the trust cash account, the income account (showing payments to beneficiaries
in this account) and the trust capital account for the year ended 31st March 2017.

(b) Prepare the trust Statement of Financial Position as at 31st March 2017.

Solution

TRUST CASH BOOK

Date Details Incom FI WR SR Date Details Incom FI WR SR
e Kshs Kshs Kshs e Kshs Kshs Kshs
000 000 000 Kshs 000 000 000
000
1/4/16 bal 200 30/6/16 Fees 200
30/6/16 Income 200 30/11/16 Contra 4,500
30/9/16 Income 300 30/11/16 12% Kenya
stock
6,650
30/11/16 EABL 4,400 28/2/17 ICDI 2,450
30/11/16 K.ENT 4,500 31/3/17 Income 120
30/11/16 Contra 2,250 2,250 31/3/17 Distribution 402
31/12/16 Income 180
31/12/16 Income 42

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 722 2,450 6,650 4,500 722 2,450 6,650 4,500

TRUST INCOME ACCOUNT

DATE DETAILS KSHS 000 DATE DETAILS KSHS 000
30/6/16 Cash (school 200 30/6/16 Cash (interest) 200
fees)
31/3/17 Admin. Exps 120 30/9/16 Cash 300
(dividends)
31/3/17 Distribution-M 201 31/12/16 Cash (Interest) 180
31/3/17 Distribution-K 201 31/12/16 Cash (interest) 42
722 722

TRUST CAPITAL ACCOUNT

Date Details FI WR SR Date Details FI WR SR
Kshs Kshs Kshs Kshs Kshs Kshs
000 000 000 000 000 000
1/4/16 Bal 4,000 4,000 3,000
30/11/1 EABL- 400
6 Gain on
disposal
30/11/1 K.ENT- 1,500
6 Gain on
disposal
30/11/16 Contra 4,500 30/11/1 Contra 2,250 2,250
6
31/3/201 Bal c/d 6,250 6,650 -
7
6,250 6,650 4,500 6,250 6,650 4,500

TRUST
STATEMENT OF FINANCIAL POSITION
AS AT 31/3/2017

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 KSHS 000 KSHS 000
ASSETS
FIXED INCOME: 2,000
Kshs 2M 10% Kenya Stock 2021
Kshs 2M 9% Kenya Stock 2020 1,800
Kshs 2M 12% Kenya Stock 2022 2,450 6,250
WIDER-RANGE
INVESTMENTS: 4,200
Kshs 4.2M 12% Kenya Stock 2022 2,450 6,650
61250 Shares in ICDI Ltd
12,900
TRUST CAPITAL:
Fixed Income Fund 6,250
Wider Range Fund 6,650
12,900

Activity 5.0

Access the link below and familiarize yourself with the provisions of the Trustees Act (Cap 167)
in regard to formation and management of Trusts in Kenya
http://kenyalaw.org/lex//actview.xql?actid=CAP.%20167

5.3 SUMMARY

The trustees have a duty of care towards the beneficiaries of the trust, and must conform to legal
and tax requirements relating to the trust. To enable them to do this, it is essential that they keep
adequate accounting records and the trustees must therefore learn trust accounting basics. The
duties of a trustee may be imposed by the law, or by the instrument or deed that sets up the trust.
The trustee has to take the care that an ordinary prudent person would exercise in making an
investment on behalf of another person. The trustee must also act within the scope of the powers
given to the trustee by the trust instrument. To show that the trustee is carrying out these duties

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properly, it is necessary to know some trust accounting basics that will help the trustee to
adequately record the income and expenses of the trust.

5.4: FURTHER READING

 GOK. Trustee Act (Cap 167). www.kenyalaw.org

 Saleemi N.A. Advanced Financial Accounting. Latest Edition
 Sadick H. K.(2009). A Background to Wills and Trusts in Kenya.

 Muganda M. and Umulkher A. (2013). Trust and Executorship Accounting. Lambert

Academic Publishing
 Odeiga Benson. (2012). Basic Elements of Executorship and Trusteeship Accounting.
Lambert Academic Publishing

5.5: SELF TEST QUESTIONS

1. What is the main purpose of preparing trust accounts?

2. Identify the main accounts prepared and maintained by a trustee
3. What is a beneficiary accumulation account?
4. Briefly explain the meaning of life tenant account
5. How do you prepare a trust capital account?
6. What is the importance of a trust statement of financial position?

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