Custodial Funds: Purpose and Accounting

If you only read one thing Custodial funds hold resources the government is just passing through, and they replaced the older Agency Fund category under GASB 84, with a sharper definition of when a fiduciary relationship actually exists.

Builds on FM9.1 Custodial funds pass the control-plus-benefit test, the government controls the money briefly but it isn’t the government’s to keep or spend.

Why This Matters

Custodial funds are the most common fiduciary fund type a district or municipality actually encounters, payroll withholding, court fines passed to the state, and knowing how to record them correctly keeps pass-through money from ever looking like the government’s own revenue.

What’s Actually Going On

A custodial fund holds resources a government collects and passes along on behalf of someone else, with no discretion over how the money gets used. The government controls the money briefly, in the sense of physically holding and transmitting it, but it never belongs to the government.

Worked example: a city collects parking fines for the state court system and keeps a 5% service fee.
The 5% fee the city actually keeps is General Fund revenue, since the city benefits from and controls that portion. The remaining 95% passes through on behalf of the state and belongs in a Custodial Fund, since the city never really owns that money, just holds it briefly before forwarding it.

How This Applies

When money flows through a government on its way to someone else, split it mentally before recording anything: what portion does the government actually keep and benefit from, and what portion is purely pass-through. Only the pass-through portion belongs in a Custodial Fund.