Property management accounting is much the same as other types of accounting and can be just as stressful. Property owners have many tasks when it comes to running their rental properties. Every property manager has to deal with the aspect of accounting to help manage assets, income, and expenses.
A well-run rental property accounting provides landlords with the amount of profit for each property they own. And a proper accounting system will also help track deductible expenses, build financial statements, and keep yourself financially healthy.
Below we’ll help you learn more about getting started with a property management accounting system, and we’ll explain property management bookkeeping and what it can do for your business.
Step 1: Separate accounts
Whether you own one rental property or more, it needs to be treated as any other business and have separate business accounts. Obtaining a separate account for your business starts by opening a checking account for property managers.
Any property income, such as a rent payment, generated by the property will go into that separate checking account. The same for any business expenses you incur as a property manager. In some cases, if you have multiple properties, it might be prudent to open a separate checking account for each of those properties to help keep track of finances.
Step 2: Choose an accounting method
The next step property managers should take when setting up their accounting system is determining which accounting method to use. There are two primary methods to choose from—accrual accounting and cash basis accounting.
Within this method of accounting, income and expenses are entered the instant they happen. Whether the money has made it to the business checking account yet or not makes no difference.
This is an important distinction when it comes to recording transactions for rental property accounting. Let’s assume that a tenant paid upfront for five months of rent payments and wrote out a check for $10,000. Under this method of accounting, property management will write in only $2,000 a month, even though the entire sum of 5 months has already been transferred to the business account.
Cash basis accounting
Under this accounting method, income and expense transactions are entered into the books as soon as the money changes hands. Using the example above, property managers would enter in the entire $10,000 into the books.
Though there are two options to use for writing down business income, cash basis accounting is the most popular of the two. The key is to make a decision in the beginning and stick to the same method throughout.
Step 3: Create a chart of accounts
A chart of accounts is almost like a cheat sheet for completing the general ledger. This chart of accounts is every account a transaction can get sorted into, letting you know whether it is an expense or income. The more detailed your chart of accounts, the more detailed information you will receive about how money moves around in your business.
Of course, the more detailed the chart of accounts, the more complex the general ledger. Having a complete record can be maintained easily enough through the use of accounting software or even an excel spreadsheet.
Step 4: Use a journal
The journal is at the heart of property management bookkeeping. This is the one spot where all transactions are tracked as they happen, usually organized month by month. If you’re using something as simple as an Excel spreadsheet, a tab for each month is sufficient.
Remember, this is for single-entry property management bookkeeping, which tends to be enough for a simple business. For property managers who have more investment properties, organizing using the double entry system might be prudent. The double-entry system takes a little more work to maintain. However, it is the best option for organizing different ledgers.
Step 5: Generate financial statements
A key step for any property management business is to generate financial statements to track the financial health of the company. Statements such as an income statement, balance sheet, or cash flow statement should also be a part of accounting records and the business strategy.
Financial statements disclose income generated, operating expenses, total expenses, and many other important financial information during the accounting period to help on-site property managers—and others—understand the long-term strategy of the rental business. This data needs to become a part of essential financial records for any business.
Step 6: Keep track of deductible expenses
Whether your property management accounting division is using simple excel sheets or accounting software to aid in the process, tracking expenses will help during tax season. Sometimes using devoted software will assist immensely with rental property accounting, mainly to help owners save time during such a time-consuming process.
For instance, Shoeboxed is a receipt scanner app and scanning service with receipt software that helps you organize and keep track of receipts and expenses. Paid plans include a pre-paid envelope that you can use to send in your receipts for processing.
Once tax season comes, rounding up key expenses will help lower potential financial liability while filing taxes. Accounting processes will help track expenses such as:
- Cost of repairs
- Mileage for travel
- Cancellation costs
- Legal fees
- Real estate taxes
- Mortgage interest
- Wages paid
The above expenses—and many more found in IRS Publication 535—can be used as tax deductions.
Frequently asked questions
Property management companies are there to manage investment properties for the owner, which includes assets, income, and expenses. As such, accounting as a property management company is part of the deal.
A property manager will handle the day-to-day aspect of the rental property, from receiving rent payments to fixing the property and even filing taxes. Whether the property management company deals with commercial property or personal property, the responsibilities are the same.
Property management accounting does not have to be a daunting task. Of course, there are responsibilities a property management company has to undertake, but those could be assisted by property management software. Accounting software, as one of the key accounting tools, has been used by many different businesses to streamline the process of property management bookkeeping.
From opening a bank account for each property to generating the right financial statement, property management accounting will keep the rental cash flow coming. As the tenant pays, property accounting will help navigate the ledger, maintain appropriate bank reconciliation during accounting periods, and ensure a gross profit.
Agata Kaczmarek has held a passion for writing since early childhood. A professional writer for many years, Agata specializes in writing articles and blogs focused on finance as someone who holds a Masters Degree in Accounting and Finance.
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