Property Management Bookkeeping: 5 Best Practices
Are you a property manager? Do you find accounting to be the worst part of your job? Well, accurate property accounting is vital for managing personal or rental property.
You see, managing finances well leads to tax savings, lowered expenses, increased rental income, and higher ROI. Since property managers handle rent payments and vendor invoices, a lot of money goes through the business every month. This leaves the business with potential liabilities. So, it’s important to establish the best bookkeeping practices to ensure profitability.
As, bad accounting can lead to a lot of liability for a property management company. For example, missing tenant payments or not accounting for expenses and revenue per client. Good property management accounting ensures your books are balanced.
So, to help you stay in the black, here are 8 property management bookkeeping best practices and tips.
Best Property Management Bookkeeping Practices
1. Open Separate Business and Personal Bank Accounts
When managing properties, it is crucial to have separate Business and Personal bank accounts. A business account has more requirements and restrictions than a personal account. If you are an established client, it is easier to open a business account at the same bank.
Separate accounts provide legal protection for your personal assets in case the business goes under. It also enhances the company’s image and credibility. Rent property accounting becomes more manageable as all transactions occur in a designated account, simplifying tracking via bank statements.
A separate account for security deposits is also necessary, as many states require landlords and property managers to hold them in separate escrow accounts.
Not having separate accounts could lead to legal issues, confusion, and inaccurate accounting. It is essential to follow best practices when managing property to avoid these challenges.
2. Create a Chart of Accounts
If you’re managing properties, establishing a chart of accounts is essential. This chart is a list of all your assets, liabilities, equity, income, and expense accounts.
With a chart of accounts, you can organize and label all your financial transactions. This way, every time you record a rent payment or invoice, it goes into a specific account.
Creating a chart of accounts may seem overwhelming, but it’s crucial to tailor it to your business’s needs. You can use something as basic as an Excel spreadsheet or upgrade to a property management accounting software solution.
The chart typically includes balance sheet accounts, such as asset, liability, and equity accounts. It also includes income statement accounts, such as revenue, expense accounts, and cash flow statements. Having a chart of accounts helps you keep track of your property management finances and makes bookkeeping much more manageable.
3. Choose a Property Management Accounting Method
When it comes to property management bookkeeping, there are two methods available.
- Cash Basis
- Accrual accounting.
The accrual principle records income and expenses as they occur, regardless of when payments are made. The cash basis system, on the other hand, only records earnings when the money arrives and expenses when a specific sum has been paid.
a. Accrual accounting
It offers excellent long-term results, but it may create an appearance of profitability. It can also be complicated to use when dealing with unearned or prepaid sums. Property management companies that use an accrual system must file financial statements to regulatory bodies.
b. Cash Basis
It is most common for small businesses, and on-site property managers often rely on this system because it keeps everything simple. However, it may overstate a company’s cash reserves, which can lead to unfavorable investments.
Ultimately, the choice of accounting method will depend on the size and complexity of the business. It also depends on regulatory requirements. So, It’s important to carefully consider the advantages and disadvantages of each system before making a decision.
4. Choose a Bookkeeping Method
Now, you might be wondering, which method to choose while managing property. Well, while bookkeeping is mainly about recording financial transactions, accounting involves reviewing and analyzing financial accounts and data.
Now, there are two main bookkeeping methods: single entry and double entry. Let’s break them down.
First up, single entry. This method is perfect for smaller property management accounting systems with minimal transaction activity. With single-entry bookkeeping, you only record a transaction once, and your income and expenses list will have a single row with positive and negative values.
On the other hand, double-entry bookkeeping is more complex. A property management business will record each transaction twice as debits and credits. Basically, every single entry to a specific account needs an opposite yet corresponding entry in a different account, resulting in a balanced outcome.
So there you have it, the two main bookkeeping methods to choose from. Depending on the size and needs of your property management business, you can choose the method that works best for you.
5. Manage Invoices and Receipts
It’s important to find an efficient way to manage all of your invoices and receipts. You can use a general accounting program like QuickBooks or property management software that’s more customized to the needs of accounting for property managers and reconciling their owners’ books.
Whichever option you choose, it’s crucial to keep a record of all statements for money going in and out of your business. This habit will help you stay organized and make things easier when tax season rolls around.
Another great tip is to make a regular reporting schedule for yourself and your owners. By doing this, you’ll be able to keep track of everything and ensure that everyone is up to date with the financial status of their properties. Plus, it’ll help you avoid any surprises or misunderstandings down the line.
Overall, managing invoices and receipts may not be the most exciting aspect of property management, but it’s crucial to keep things running smoothly. By following these best practices, you’ll be well on your way to success!
Conclusion
In summary, good bookkeeping for property management not only helps you make profits but also ensures compliance and reduces the risk of legal issues. However, it’s not just about having knowledge; you also need to make sure that the information you collect is accurate.
Spending just 15-20 minutes a day to check new transactions can be helpful. It’s crucial to have a solid understanding of the basics, supporting technology. Also, discipline to ensure that your strategy provides an accurate view of your business and doesn’t hinder your growth plans.
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