Real estate is one of the most profitable but, at the same time, one of the most complex industries in the world. It is necessary to invest in many properties to generate significant income in this market. It is fraught with the emergence of many assets, operations, and figures that need to be tracked; therefore, precise accounting is a vital part of such a business. Entrepreneurs often think of real estate accounting as a boring job only needed to protect themselves from regulatory institutions. In reality, the correct recording of economic information is your key to making rational decisions, growing cash flow, and efficiently managing assets.
The definition of accounting in real estate
Property accounting is a vital management element for building a successful business as it provides financial transparency and accuracy. Such a type of economic activity differs from other kinds of accounting in that it considers the unique characteristics of the rental property industry, including property ownership, financing, and leasing.
Proper real estate bookkeeping allows you to predict the following economic data:
- business growth and development opportunities
- what areas need improvement
- the total amount of profit for a certain period,
- a size of accounts payable.
Using qualified real estate accounting, investors can get an entire picture of the profitability of their investments and make informed business decisions. Besides, it is beneficial for sellers and buyers as it helps them protect their financial interests.
Differences between accounting and bookkeeping in realty
Often people confuse accounting and bookkeeping techniques, but there are some differences between them. Accounting is a broader term; it involves more tasks, while bookkeeping is more about bills and payments.
Consider the basic principles of bookkeeping:
- control of payments to vendors,
- tracking the accuracy of accruals,
- monitoring of regular and automatic payments,
- invoicing tenants.
Bookkeeping also includes checking bank card payments and payroll.
Accounting is more about preparing for taxes and understanding the company’s profit or loss. It involves the following procedures:
- work with money to get maximum profits,
- strict adherence to all legislative rules regarding the payment of taxes,
- performing financial audits.
Many real estate entrepreneurs will be pleasantly surprised to learn modern software allows you to automate various bookkeeping and accounting processes. The list of functions may vary depending on the organization’s needs and size.
Basic components of realty finances
Several components in real estate accounting can be affected by the transaction. Consider these parts when carrying out financial accounting for organizations that operate in the immovable field.
- Assets are a firm or individual’s resources that can be turned into cash. All properties owned by the firm are its critical assets.
- Liabilities: the term refers to the money a company owes, e.g., to mortgages. There are two groups of obligations: current obligations, debts you must pay within a year, and fixed debts, with a maturity of more than a year.
- Personal capital is the resources of the company minus its obligations. In the real property area, equity also includes the distinction between the housing cost and the amount the proprietor owes according to the mortgage agreement—such a computation acts as a representation of the organization’s worth.
- Revenue is the capital individuals receive for performing work or providing services. In the real estate field, realtors are remunerated for property sales, and managers accept payments from the tenant’s rent.
- Costs: these are expenses for doing business. Spending property firms include the training of brokers, whereas property management firm expenses often include the tenant’s immovable maintenance.
When registering real estate operations, the challenge is to balance the books; that is, assets must equal the sum of liabilities and personal equity. Financial professionals must address these issues by adhering to generally accepted accounting principles (GAAP).
Main advantages of property accounting
Comprehending all the intricacies of accounting will assist you in successfully running a business in the property area, and triumphant book management allows you to track progress effectively. This way, the owner may see if the company is making a profit and which departments are doing well. Consider other benefits of professional bookkeeping:
- Improved cash flow: fast rental report submission, paying tenants on time, and waiting until the due moment to settle with vendors are the main paths. A reliable accounting system makes it easy to manage accounts payable so that vendors receive payment on time and provide discounts.
- Control of income and costs: it is helpful to form a bookkeeping system to monitor real estate investors and spending. You may use special cloud software that can be easily launched on any gadget and allows you to track the movement of capital in real-time.
- Better tax audit options: a robust accounting system will create a paper trail to verify any income or expense item. Proper organization of financial transactions will allow you to find invoices or receipts requested by the regulatory authorities quickly.
If you keep financial records responsibly, you may compare rental rates over different periods. It lets you evaluate which property to keep and which to eliminate. You may also define cash on cash return.
The common challenges in real estate finances
Suppose you’re new to being a bookkeeper in any area. In that case, errors are inevitable as you’re just getting used to working with books and implementing an accounting model that works in your style. Let’s look at the most famous errors when making financial records:
- Lack of files and data backups: if you store data in the cloud, check if you have enabled backups. If you keep data in other ways, e.g., on paper or spreadsheets, consider how you can duplicate information.
- Do not dump all costs in one heap: entrepreneurs counting on tax incentives must classify expenses correctly; there is no need to think all cost groups are the same. If you are not a tax professional, seek the help of specialists who can help you sort out all types of capital flight into separate categories.
- Control of prepaid rents: you need to understand when to recognize cash as prepaid rent. It is directly related to the accounting method used in the property industry. You must know how to account for down rent payments and keep consistent records throughout.
Real estate accounting has challenges, so you must consult experienced accountants who can help you navigate them by setting up specialized software and advanced financial tools to manage your accounts.
Primary duties of a real estate accountant
Financial activities cover many aspects and track many economic parameters. You may be tempted to do bookkeeping independently if you run a small business or enjoy complex objectives. We recommend you use the services of professionals, as any mistake or incorrect data entry may result in significant fines. Most often, the list of duties of a specialist includes such activities:
- Accounting: create accurate financial records, including rent roll, receivables, obligations, and general ledger.
- Financial reports: preparation of financial documents, including balance sheet, income statement, and statement of capital flows. Specialists also provide data to company management and stakeholders.
- Tax reports: compliance with various levels of laws and timely filing of tax returns.
A qualified bookkeeper guarantees financial well-being and stable earnings from the property. It ensures the accuracy and relevance of economic data, the management of income expense, as well as strict compliance with all standards.
How to make real estate accounting easier?
If you were planning to do bookkeeping yourself, but the data on how to organize bookkeeping seems too complicated, do not despair; there are several options to simplify financial activities. Property agents can choose one of the bookkeeping options depending on the budget:
- Outsource work: as your property company develops, working with a skilled accountant is an excellent idea. A specialist can save a lot of time and effort you spend recording transactions and analyzing financial indicators.
- Adopting an advanced accounting program: user-friendly programs allow users to learn different accounting processes quickly. There are various cost options and free trials. You may select a cloud-based platform that will enable you to store all economic data in one place and have access to it 24/7.
When choosing software to deal with property, study the tariff plans of various programs, then look at the proposed functionality to see if it suits your business needs. Finally, define the platform’s ease of use, including customer support and training offerings.
Some tips for how to set up your real estate accounting
Many investors find property bookkeeping to be tedious. Purchasing, selling, and managing a home is fun, but working with money is not fun. However, accounting is a battlefield where you can win or lose the investment game. Let’s discuss some essential practices for building a sound accounting system.
Determine the accounting method
Before you begin reporting on a firm’s financial results, you need to define the variant of record keeping; there is accrual accounting and cash accounting.
- Accrual accounting involves recording revenue when you provide a service to another party with the expectation that the money will arrive later. Similarly, expenses are noted until the receipt of capital.
- According to cash accounting, revenue is shown in the income statement after receiving capital, and expenses are recognized when cash is transferred; it is the optimal option for small businesses.
The accrual method does not control cash flow. The firm may be promising in the long run, but in the short run is experiencing a shortage of capital. At the same time, the cash basis can overestimate a firm’s wealth.
Use double entries
The double-entry algorithm relies on the idea that for every credit, there is an equal opposite debit. In this case, the debit increases the value of the accounts, and the credit, on the contrary, reduces the worth.
Double-entry bookkeeping involves checks to make sure each entry is correct. You’ve made a mistake if the two debit and credit lines don’t match. It is vital to quickly resolve any inaccuracy so that it does not affect your taxes and financial flows.
Separate individual and business finances
Never mix personal money and business income. Consider opening a checking account for the firm to separate company funding. Keeping all the organization’s money in one place facilitates financial control and avoids the situation where you spend the company’s income on personal matters.
Conclusion
Accounting is one of the core processes in property firms, as it allows them to control financial transactions and analyze their performance. Choosing BooksTime’s professional financial services helps realty firms obtain accurate financial statements and compare them with other firms to evaluate their market performance.
BooksTime is an experienced financial and accounting organization ready to provide you with a team of qualified accountants and economic experts to manage your real estate accounting needs. Our significant experience helps to cope with all types of financial work and guarantees a clean balance sheet. Commit to your estate bookkeeping now to achieve excellent results.
