The real estate market has taken some interesting twists and turns over the last several years. If you are one who has jumped on the bandwagon, then there are a few things you should be aware of when it comes to the real estate accounting process.
Real estate is an industry that involves enormous sums of money and a lot of transactions. Like with any industry, there’s a lot involved in staying compliant with tax regulations on all levels. Therefore, it’s essential to keep accurate records of every transaction so that your financial statements are accurate and that you are able to meet all of the required deadlines.
The challenge is in finding a real estate accounting system that is accurate and efficient. Here we will cover who falls into the real estate accounting category, why real estate accounting is so important, and some best practices to follow.
Who falls into the real estate industry accounting category?
Real estate accounting is an important component of property management. Therefore, if you deal with the sale or rental, or if you manage or invest in property, then you need to learn all you can about the real estate accounting process.
This category includes those who…
- provide real estate services or own a real estate agency
- manage a construction company or properties for clients
- maintain housing association fees & accounts
- oversee investment trusts
Recording and tracking all of the above transactions is referred to as real estate accounting.
Why is real estate accounting so important?
Tracking and keeping a record of every transaction can be time-consuming and tedious. That’s why it is so often overlooked and deemed as unimportant. However, that couldn’t be further from the truth. Creating and understanding all the ins and outs of your real estate accounting system is actually one of the most important paths to the success of your business.
An effective real estate accounting system will help you run your business more efficiently because it allows you to monitor your progress and goals along the way. You will easily be able to track which properties are performing well and making a profit and which properties you are losing money on.
Equally as important, down the road, you will be able to compare financial performance from year-to-year, keep track of your cash flow, make timely payments, meet filing deadlines, and make tax time so much less complicated. Maintaining an efficient real estate accounting system is crucial to the growth and success of your business.
Finally, there are mandated accounting standards that a real estate business must follow that are specified by the government. These accounting standards are set by the Financial Accounting Standards Board. Participating in financial practices that are dishonest or incorrect can lead to financial and legal problems.
Any practices that mislead and are done deliberately can lead to prosecution and being charged with a crime. Therefore, it’s essential that you are set up with and know how to use a real estate accounting system that will keep you in compliance with all regulations.
If you’re not comfortable with the financial process, then you should seek out a real estate accountant who can advise and handle the financial end of your real estate business.
What are the best practices to follow when setting up and maintaining a real estate accounting system?
The following are 13 fundamental steps to follow to make the accounting process for your real estate business more efficient.
1. Choose an accounting method
There are two main accounting methods to choose from. These include the cash method and the accrual method. If using the cash method, any income is recognized when received and expenses are deducted when paid. With the accrual method, income is reported when earned and expenses are reported as they occur.
Most realtors choose the cash method since it caters to the buying and selling process carried out by real estate agents. Expenses are immediate and income is usually recorded when a sale closes or rent is received. This makes it easier to track the cash flow.
2. Set up double-entry bookkeeping
Set up a double entry bookkeeping system for your business transactions. Regardless of the method you choose, you’ll want to use a double-entry accounting system. The double-entry system means that every transaction has a debit and a credit.
With the double-entry method, it’s easier to track profits through your expense accounts and it also provides a way to recheck your data entries. The debits and credits should always equal each other.
See also: Bookkeeping for Real Estate Agents
3. Separate your personal and business checking account
Real estate investors find it much easier to separate business transactions from their personal transactions. It’s always a good idea to open a separate business checking account. This makes it a lot easier to locate business transactions when needed, especially at tax time when preparing tax returns.
4. Establish a chart of accounts
A chart of accounts that includes categories such as assets, equity, revenue, liabilities, and expenses helps to separate income and expenses. The chart of accounts can be customized based on the real estate companies’ and property investors’ needs.
5. Track and categorize income and outgoing expenses
All real estate transactions should be categorized and placed under the associated accounts. This makes it easier to track where your money is coming from and how much, as well as how much money is going out and to where.
This will give you a better idea of where to cut corners if needed and where your most profitable business activities are. This is essential if you hope to experience any kind of business growth.
6. Anticipate predictable operating costs
Since cash flow can seem more like a rollercoaster in the real estate industry, it’s important to always have enough business funds in your account to cover all of your expenses. Prior operating expenses can be used to predict and anticipate some of your future expenses. By using that as a guide, you can at least get a good estimate of how much should remain in your account to cover the basic expenses.
7. Reconcile accounts
The reconciliation process is essential because it ensures your records are accurate and jive with your bank account balance. If you reconcile on a monthly basis, then if there is an error, it won’t snowball over a lengthy period of time.
8. Keep books updated
Keeping your books updated is essential if you want to keep a constant eye on your cash flow. Always make sure to set some time aside to enter all of your financial transactions so that your books stay updated.
This way you can access your account balance in real-time, are more likely to have fewer data entry errors, are more likely to generate accurate financial reports, are more likely to make timely bill payments, and it will make preparing tax returns much less complicated.
9. Evaluate business performance monthly by generating accurate financial reports
This is where the generation of accurate financial reports is so important, such as income statements, net cash flow reports, and capital expense reports. Always be sure to review your monthly financial reports to see how your business is performing, what’s working, and what isn’t. This will help you to evaluate profit margin, help forecast future income & expenses, and keep you from getting off track while pursuing your real estate business growth and goals.
10. Digitize and organize supporting documents
Every income and expense transaction should always have a supporting document to back it up. Many rental property owners scan and upload their documents to a cloud-based storage system such as Shoeboxed. Storing supporting documents like receipts digitally will save you a significant amount of time when tracking receipts for tax returns and tax audits.
11. Use cloud-based accounting software
Cloud accounting-based software provides instant access to your business financial data at any time from anywhere. It keeps all of your financial information organized and in one place. It makes it easy to share information with team members or clients. It also saves a lot of time when it comes to invoicing real estate clients and generating reports.
There are many realtor accounting softwares to choose from, so pick one that. works best for you.
12. Outsource accounting tasks if needed
If you’re not comfortable with your own accounting skills, then it’s time to outsource some of your financial responsibilities. It’s hard for those in the real estate sector to keep up with and be an expert in every facet of the business.
This is where real estate accountants who have the experience, background, and keep up on all the tax laws in real estate can really come in handy. Real estate accountants can save you a lot of time and money in the long run.
13. Prepare sooner rather than later for tax season
Having your real estate firm’s books in order for tax season will save you a tremendous amount of time, money, and sanity. This will make the tax process much easier and faster.
It also gives you plenty of time to optimize your deductions. This way when it comes time to prepare your taxes, you will have everything on hand and organized. This will also minimize errors on your tax return.
An efficient real estate accounting system is crucial to the growth and success of your business. Your real estate business can really benefit from tax-saving strategies such as tax deductions. Without a reliable accounting system, you wouldn’t be able to take advantage of these money-saving strategies. You can take the additional step and learn about the accounting cycle to stay compliant and transparent with your financial health.
Caryl Ramsey has years of experience assisting in different aspects of bookkeeping, taxes, and customer service. She uses a variety of accounting software for setting up client information, reconciling accounts, coding expenses, running financial reports, and preparing tax returns. She is also experienced in setting up corporations with the State Corporation Commission and the IRS.
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