Read on to learn how important real estate accounting is, a crash course on how it works, and some of the best real estate accounting software on the market if you’ve been thinking about setting up a system for your real estate accounting but keep putting it off because you’d rather spend your time on other money-making activities.
Real Estate Accounting – Purchase Property (Part 1)
Professionals who use real estate accounting
Real estate accounting is frequently used by experts who run real estate or property management businesses. Individual real estate brokers or professionals in charge of a company that hires numerous agents are referred to as real estate businesses. These businesses can evaluate their financial performance and growth, effectively manage their taxes, and create business strategies by utilizing real estate accounting techniques. As real estate professionals may handle large-scale transactions when assisting clients in buying or selling properties, understanding accounting techniques related to transactions is also essential.
Real estate accounting may also be used by other professionals who work for or with the real estate industry. Owners of construction firms, account managers for housing associations, and real estate investment managers are some of these professionals.
What is real estate accounting?
Accounting is the process of managing a company’s finances, which includes keeping track of all of its financial transactions. Accounting is needed in the real estate sector to manage business finances and keep track of transactions involving the purchase, sale, and rental of properties. Knowing how to perform real estate accounting tasks can help you run a real estate or property management business more efficiently and for less money than outsourcing.
Main elements of real estate accounting
In accounting, there are five elements affected by transactions. When performing financial accounting for real estate businesses, you must take the following into account:
Your objective when entering transactions for accounting purposes is to maintain balance in your books, which means that your assets should equal the sum of your liabilities and equity. If you don’t have experience with accounting, you might want to enroll in classes to learn how to handle simple accounting duties and adhere to generally accepted accounting principles. Additionally, a lot of the accounting software readily available today can make it simple to finish and comprehend this process.
Tips for real estate accounting
You can use the following advice as a guide if you’re interested in performing accounting for your real estate business:
Choose an accounting method
You must choose an accounting method before you start keeping track of your company’s financial records. You have the following options:
Each approach has benefits and drawbacks, so you can research them to determine which one is best for your company. Typically, cash-basis accounting represents a simpler method for small businesses. Because it outlines current business deals and anticipated payments, accrual accounting can assist larger businesses in tracking their long-term finances. Once you’ve decided on a method, you cannot change it unless you ask the IRS to do so.
Create a chart of accounts
Using a chart of accounts to organize real estate transactions is beneficial. The “accounts” refer to different categories of transactions. You can include your transactions in these categories on financial reports. Your revenues and expenses are typically separated on a sales chart, after which you can create corresponding categories for each These categories will vary based on your business. For instance, a real estate company might have expense accounts with categories like advertising expenses and cost of sales along with revenue accounts with categories like residential revenue and commercial revenue.
You must group comparable categories in a chart of accounts and give each category a unique code. You would record every transaction you completed under the appropriate category. You can add a description to each entry to make sure you comprehend the transaction’s goal. For creating charts of accounts, the majority of accounting software provides examples or templates. A sample chart of accounts may look like this:
Keep expenses separated
Set up a distinct bank account to pay for costs associated with your real estate business. By taking this step, you can gather all of your business expenses in one convenient place. Your ability to track business-related costs and transactions makes it possible for you to evaluate your cash flow and expansion. You can avoid sifting through transactions to distinguish between business and personal ones if you have separate accounts. When the two are combined, they can also keep financial data organized and prevent bookkeeping errors or potential legal problems.
Create an organization system
You must maintain organization of your financial records in order to effectively manage your real estate accounting or bookkeeping duties. Make sure you have a system for organizing and finding documents that works well. You can maintain these documents physically or digitally, depending on your preferences.
With the ability to access documents from anywhere thanks to digital files, sharing documents with others can be made simpler. Being organized is crucial because you may eventually need to consult these documents, such as when preparing taxes or confirming financial data. Examples of the documents you need to maintain include:
Ensure the accuracy of your recordkeeping
You need to make sure that business transactions are accurate in addition to recording them. You can accomplish this by monthly reconciling your business’s bank account. To ensure that the transactions and balances match, you must compare your bank records with your business records. Both must show the same amount of money entering and leaving your business over time.
During reconciliation, you might find inconsistencies that are the result of mistakes in accounting or banking, fraudulent charges, or delays. The balances might not match, for instance, because your bank has not yet processed a transaction. This process highlights how crucial it is to keep track of and save all of your financial documents because you may need to use them to fill in any discrepancies or gaps.
Use digital software for efficiency
By utilizing digital software and applications, you can increase the effectiveness of your recordkeeping procedures. Due to the prevalence of cloud-based applications, you can access your accounts from various devices. When storing important documents, digital software can also increase security by requiring a passcode for access, for example.
For instance, recording receipts is a crucial accounting procedure for business owners. Applications for smartphones exist that make it simple and quick to scan receipts. You don’t have to be concerned about misplacing or losing the originals when you have digital copies.
Using software can also help simplify or automate accounting tasks. If you have little experience with accounting, these resources can teach you how to carry out accounting duties and make them simpler to comprehend. The majority of software also assists you in adhering to applicable tax laws, but you should always check your work before filing. Based on your requirements, you can investigate the various accounting software options available for your company.
Consider using professional support
You might want to seek out expert assistance when performing real estate accounting for your company. Even some accounting firms and accountants specialize in handling the accounting for real estate and property management companies. These experts are familiar with all the pertinent local and state real estate commission rules and regulations that you must abide by. They can assist you in comprehending the regulations and how they may affect your business or accounting procedures. Professionals in real estate accounting can also give you additional business guidance, such as pointers for handling your finances well.
Is real estate accounting a good career?
Real estate accounting is great training for other professions and a great foundational degree. You will gain knowledge of asset management, working with municipalities, payroll management, property development, tax law, and countless other fields of expertise during your first three years on the job.
What do property accountants do?
For their business, property accountants are in charge of handling property accounting tasks. They are in charge of carrying out sound financial analysis and reconciling the balance sheet. Additionally, they create consistent reports (typically monthly) based on organizational goals.
What does CPA mean in real estate?
A competent real estate CPA can assist investors in structuring transactions to reduce potential taxes while remaining compliant.
What is real estate development accounting?
Real Estate Development Accounting. Real estate development accounting focuses on the purchase, development, or remodeling of an asset (land or a building) for potential future sales or rentals (both profit and loss activities). The balance sheet is a tool used by developers to monitor their remodeling or development costs.