Top Bookkeeping Essentials For Property Accounting

Thu, 10 Jun 2021 11:00:00 -0500

Bookkeeping can be a tedious task in the real estate industry because of the large number of transactions. A majority of Americans live in rental accommodation, with 41% of them renting single-family homes.

As a property manager, accounting for the client’s property will be your responsibility. If you have just started with property accounting, getting your bookkeeping fundamentals right can set a strong base for you.

Here are the top bookkeeping essentials to get you started.

1. Know the Guidelines

Every state has specific rules that serve as guidelines for property accounting.

For example, most states in the US have set a limit on the security deposit amounts that can be collected from tenants. Keeping up-to-date with the property accounting guidelines of your state can save you, your tenants, and your clients from legal hassles later on.

If you find administrative guidelines hard to understand, you can seek the help of a professional who specializes in real estate accounting.

2. Choose an Accounting Method

As a property manager, you can choose between two accounting methods to keep your books: cash-basis and accrual.

Cash-basis accounting is popular for its simplicity. It accounts for the cash as it is received or paid. The accrual method, on the other hand, records the revenue and expenses when they are generated.

A major disadvantage of cash-basis accounting is that it does not consider the accounts payable and receivable. It can show a profit for the company on the books when in reality, the company still has a large sum to pay.

The accrual method can be complex but is also more accurate. It records every anticipated transaction, which is a better way to gauge the financial health of the firm.

3. Choose A Bookkeeping Method

After accounting, you need to choose a bookkeeping method. There are two ways to do this: single entry method and double-entry method.

In the single entry method, you record each transaction only once, as income or expense. You can either use a single column or split it into two columns for both entries. This method is suitable for simple businesses.

If you own or manage several properties, you should go for the double-entry system. Here, you enter each transaction twice--one as debit and the other as credit. It can be more work, but it is better than maintaining several ledgers for different properties.

4. Organize Your Entries

Most property managers opt for accounting software to organize their transactions. Unlike spreadsheets, accounting software is designed to simplify the process of recording financial transactions.

Cloud-based software like Yardi Voyager combines property management and property accounting into a single platform. You can access and modify the financial data from anywhere if you have a connectible device.

5. Set Up Your Chart of Accounts

Setting up a chart of accounts helps you organize your financial entries by categorizing the transactions. You can use it to generate reports, measure performance, and go through past entries.

Depending on your business needs, the chart of accounts can be divided into as many divisions as you want. For example, you may have different accounts for “maintenance,” “insurance,” and “advertising.” Basically, it is a list of all your assets, liabilities, income, and expense accounts. A chart of accounts contains a few columns.

Every time a transaction is made, you enter it in the chart. Include an additional column to write in any details about the transaction. Make sure that every transaction is recorded in the chart.

You can use something as simple as an Excel sheet to create a chart of accounts. But, a more efficient way is to use accounting software. For example, ZohoBooks is an excellent software to keep track of your transactions. It manages your finances by automating business workflow across departments so you can access all the financial information with ease.

6. Separate Your Personal and Business Accounts

You should separate all your real estate transactions from your personal account. This helps to keep all your business transactions in one place. You can quickly go through the account history to know about processed and pending transactions.

If you mix it up with your personal account, it will be difficult to separate business transactions from personal ones. This can lead to poorly managed cash flow and disorganized books. Experts say that mixing your personal and business accounts is an early mistake that could add tax costs.

Having a separate business account makes you more professional from the client’s perspective. Clients prefer issuing checks in the name of your business, which increases your credibility as a property manager.

Other than a business account, it is good to have separate accounts for security deposits as well. Many state laws demand that a landlord or property manager hold the security deposits in separate escrow accounts. This makes the funds readily accessible when a tenant decides to move out.

If your state allows it, you can also hold the security deposit in a trust. That way, you can keep track of the income and expenses generated per client.

7. Organize Documents

Organizing your documents to support your accounting books can help you solve discrepancies later on. Some of the documents that you should keep are:

Bank Statements
Invoices and Receipts
Insurance documents

Tax returns
Contracts and Leases

You can keep a physical copy of the documents or store them online. But if you choose to keep them digitally, make sure to use a secure platform. Storing them digitally can help you maintain and track them easily, even a few years down the line.

8. Keep Track of the Collections

Keeping track of the collections can be difficult and time-consuming. But by following a few simple steps, you can easily complete this process.

The first step is to improve the terms of your invoice. If you use effective invoice terms, your payments will get quicker. Use these tips to make better invoices:

Include the contact information, due date, and the amount to be paid.
Keep track of your payments by numbering the invoices.
Accept multiple smaller payments to clear a large bill.

Next, you can collect payments through online platforms. Automating payments is the best way to make sure you receive them on time. It can send automated reminders to clients, enable online payment collection and alert you on missed payments. It also ensures transparency and security, as all the financial details of the client are encrypted.

9. Prepare for Unexpected Expenses

One business mistake that most property managers make is thinking that their properties will always be rented. Cash flow in real estate is not stable. Say three out of your ten properties aren’t rented for a few months. That’s a 30% reduction in your revenue. If you have to pay the mortgage for those few months from your personal account, you are not doing it right.

A CNBC study says that nearly 20% of American renters are behind on their payments. If you encounter expenses due to late rent payments, repairs, and unexpected maintenance, then your emergency fund can save the day.

You can also be better prepared by analyzing the expense reports of previous years. Also, consider worst-case scenarios such as a tenant breaking the lease or an unexpected leak in the property. Calculate the numbers to decide how much you should save in the emergency fund.

10. Regularly Reconcile Your Bank Accounts

Keeping track of your collection can be worth nothing if they aren’t reflected in your bank account. Regular reconciliation of accounts can help detect missed transactions, incorrect numbers, and duplicate entries.

You should reconcile the accounts at least once a month to ensure accuracy. The process includes identifying bank errors, time delays, and other mistakes and rectifying them using relevant documents.

Many property managers put off reconciliation as it can be time-consuming. A simple solution is using software like Zoho Books to initiate the reconciliation of your bank accounts. You can choose to do it at the end of every month or a period of your choice.

11. Save on Tax Deductions

If your records are up-to-date and accurate, it’s easier to save money on tax deductions. You can claim the cost of education, travel, and professional services you hired for your businesses.

Given the Covid-19 pandemic, tax laws have been changing from time to time. Keep track of the current tax code to build an effective tax strategy.

Good accounting practices can spare you a lot of liabilities and make your business flourish. It is not enough to just update your knowledge. Instead, you should implement it in your business strategy. Sparing few minutes a day to manage finances can go a long way.

Having a solid grasp of bookkeeping fundamentals, along with proper software, can make bookkeeping an easier task.

If you have difficulties finding the right software for bookkeeping, we have the right solutions for you.

At Assetsoft, we ensure seamless implementation of all the necessary tools to build automation software that fits your requirements. We provide complete solutions to all your software needs through multiple systems like Yardi, Uipath, and Zoho, among others.

Talk to us to know more about how we can help you with your back office accounting needs. Outsource your bookkeeping and focus on what’s more important. Contact us today!

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