In estate administration, accounting is used to facilitate the reporting by the personal representative (also known as a fiduciary) to the court. This reporting involves two main aspects: accountability and the distinction between principal and income.
Accountability emphasizes that the personal representative is responsible for the assets of the deceased and for their administration and disposition. Estate accounting reflects the assets for which the fiduciary is charged with responsibility, as well as the distributions and payments to creditors and beneficiaries.
The distinction between principal and income is a fundamental concept in estate accounting. Principal, also known as corpus, refers to the property set aside in trust for eventual distribution to the remainderman (the person named to receive the principal of an estate at the conclusion of the income beneficiary's interest). Principal consists of the net assets of the estate on the date of death, which is calculated by subtracting the liabilities from the gross assets.
Income is the return in money or property derived from the use of principal. It represents the earnings on the net assets of the estate and includes things like rent, interest, dividends, and revenue earned during the administration of the estate. Income may be charged with various expenses, such as ordinary repairs, insurance premiums, and taxes, depending on the specific terms of the will.
In some cases, the income of the estate (or a portion of it) is designated for the benefit of an income beneficiary for a specified period of time. After this time, the principal is distributed to the remainderman. It is important for estate administrators and trustees to understand and follow the terms of the will in regards to the distribution of principal and income.