Putting the Pieces Together
In this series, we are covering the basics of property management accounting. Part 1 discussed some of the more common accounting terms you will encounter throughout this series. Part 2 included books and accounts for your property management company and your clients. This article will address how to apply your newfound accounting expertise in the real world.
If you've been following the advice given in Parts 1 and 2 of this series, you should have a few things in order. A basic familiarity with terminology, a set of 3 accounts and books for each property you manage, and some necessary funds in the form of a property reserve and some security deposits.
Choose an Accounting Method
We covered these terms in Part 1, but if you haven't given it more thought, here's another chance. It's wise to utilize one primary method of tracking and recording how money moves into and out of your accounts. You have one of two choices when making this decision.
1. The Cash Basis Method
This method of accounting requires you to enter transactions on your books when you exchange money. For example, you may have a small property that you rent on a seasonal basis. When renting this property, you ask tenants to pay for three months upfront at a rate of $2,000 a month. Using the Cash Basis method of accounting, you would enter the entirety of this dollar amount, $6,000, as income as soon as the tenant paid you. The critical distinction with this method is that you are only entering income that has already changed hands.
2. The Accrual Method
This method is a little different than the Cash Basis method, in that you enter income and expenses as they occur regardless of whether money has changed hands or not. If rent is due on the first of the month, you will track this in your books even if you are still waiting for a bank transfer that will post on the second or third. Using this method, If the tenant in the example above paid three months of rent upfront, you'd still track each month's rent in your books as a $2,000 deposit.
Simplify Your Book-Keeping
By this point, you've chosen an accounting method, created accounts for different purposes, and set up books for each property you manage. Use this opportunity to set up a chart for your accounts. This type of reference allows you to list every account that a transaction can be sorted into and makes it easy to see whether an account deals with expenses or income. This chart should serve as a reference that allows you to keep your book-keeping consistent across your properties. You will always spend and deposit money the same way if you follow a firm set of guidelines.
You'll also need to put some thought into how your books will look for each property. Once again, consistency will serve you well if you are managing multiple properties. An easy way to approach your books is to track income and expenses in a journal format. Ideally, you would organize this month by month and track transactions as they occur. If you are managing a small number of properties on your own, you may be perfectly content to keep a simple single-entry ledger in this format. If you are managing more properties or a more complex operation, there are many compelling reasons to use a double-entry system. The fundamental difference between a single-entry and double-entry system is that a double-entry system will always balance every debit against a corresponding (and equal) credit.
Expand Your Understanding, Expand Your Company!
Are you ready to grow a property management business, but feel like you need to learn more before you're totally confident? Our full course, "How to Start, Run, and Grow a Property Management Business" will teach you everything you need to know to get a successful property management company off the ground. This online course can be completed at your own pace, and you can come back at any time. You can take this course when and where you want, so you always have the tools and resources you need to build your company from the ground up!