Which of the following accurately describes escrow?

• A. A process of depreciating an asset over its useful life.
• B. A method of recording revenue when cash is received, regardless of when it is earned.
• C. A type of loan provided by a bank to finance the purchase of inventory.
• D. A financial arrangement where a third party holds funds or assets until specified conditions are met.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the term 'escrow' in financial accounting. Escrow refers to a financial arrangement where a third party temporarily holds funds, assets, or documents on behalf of two other parties until certain conditions or obligations are fulfilled.
2. Step 2: Analyze the options provided in the problem. Each option describes a different financial concept, and you need to identify which one aligns with the definition of escrow.
3. Step 3: Eliminate incorrect options by comparing their descriptions to the definition of escrow. For example, depreciating an asset over its useful life is related to asset management, not escrow. Recording revenue when cash is received is related to cash accounting, not escrow. A loan for inventory purchase is unrelated to escrow.
4. Step 4: Focus on the correct option, which states that escrow is a financial arrangement where a third party holds funds or assets until specified conditions are met. This matches the definition of escrow.
5. Step 5: Conclude that the correct answer is the option describing escrow as a financial arrangement involving a third party holding funds or assets until conditions are met.