Real Estate Chart of Accounts and Bookkeeping Strategies
Chart of accounts and bookkeeping are important for real estate companies as they are prerequisites for financial budgeting. In addition, the real estate business involves complex operations, from buying and selling to property management. So keeping a record of financial transactions is essential. In this article, we will discuss a real estate chart of accounts and bookkeeping strategies.
A well-prepared chart of accounts allows real estate agents to safeguard their financial well-being and maintain an organization for crucial tax compliance and collection tasks. The real estate chart of accounts will enable you to categorize and simplify the complicated financial data of your company. It helps to categorize data into understandable, logical account categories. It also aids in establishing real estate financial models.
What is a Chart of Accounts?
A chart of accounts for a real estate company represents all the accounts of your business gathered in one location. It gives you a birds-eye overview of every financial transaction of your company. The real estate chart of accounts will be different from other businesses because of the different nature of the business and distinct accounts.
A chart of accounts enables you to categorize all of your company’s transactions during a given time. In addition, it allows you to obtain insight into the success of different sections of your organization by separating your revenue, liabilities, assets, equity, and business expenses. Finally, by detailing all the accounts implicated in your business’s daily activities, the chart of accounts aids in financial budgeting and planning.
Bookkeeping and chart of accounts are crucial for more than merely recording and storing financial data. They allow you to:
- Assess your business health easily
- Predict its future performance
- Provide information to your banker and accountant
A solid business structure is because of your chart of accounts. Thus, it’s worthwhile to devote the time (or hire professional support) to create one that fulfills your specific needs.
Overview of the Real Estate Industry
The real estate industry includes land improvement and modifications, including constructions, furnishings, roads, buildings, and oil and gas pipelines. This industry can fluctuate depending on the national and local economies. Still, it remains somewhat consistent since people always need homes and businesses always need office space.
As cities developed, the need for real estate transactions increased. And to manage these growing transactions, accountants and bookkeepers are equally important in this industry. In addition, we must know the importance of bookkeeping and a chart of accounts for real estate agents.
The real estate industry has evolved rapidly in the past decades. Let’s examine the industry’s operations and the primary vocations and careers inside it. The real estate sector comprises several categories:
Purchases of undeveloped land, redevelopment, construction projects, rehabilitation, and sale or rental of the project to end users are all steps in the real estate development process. In addition, developers can benefit by enhancing the worth of the land (by adding structures or upgrades, redistricting, etc.) and accepting the risk of financing a project.
Sales and Marketing
Developments collaborate with sales and marketing companies to sell the structures and apartments they produce. These businesses create all promotional material and use their sales representatives to sell the finished goods inventory, earning a percentage. These businesses usually concentrate on new units.
When we talk about brokerage, we talk about a company that employs a group of real estate agents, also known as brokers. These agents help facilitate a financial transaction between property purchasers and sellers. Their responsibility is to represent both parties. Also, to work with them to negotiate the most favorable conditions for a sale or purchase.
The property management companies help building owners in renting out the apartments within their structures. They also manage renters, show apartments, correct defects, execute maintenance, and charge interest. They demand payment from property owners, usually in the form of a portion of the rent.
Since almost all assets and projects rely on power and influence (debt) to subsidize their operations, lenders play a significant role in the real estate industry. Banks, credit unions, individual lenders, and governmental organizations can act as real estate lenders. And this is where accounting and bookkeeping also play a critical role in this industry.
The real estate industry has the support of some experts who work in it. Other than those already mentioned, the most frequent examples are those of accountants, attorneys, design professionals, remodelers, general contractors, consultants, and artisans.
Real Estate Chart of Accounts – Accounting and Bookkeeping
Accounting and bookkeeping are crucial for the real estate industry as they help in the financial analysis of a company. Even though most investors certainly don’t enjoy accounting, excellent accounting and bookkeeping help increase real estate companies’ profits by precisely tracking income, costs, and tax deductions. Like other companies, a real estate chart of accounts is also prepared after the bookkeeping of financial transactions.
Even though bookkeeping and accounting are sometimes known interchangeably, there is a significant distinction between the two:
It includes setting up a chart of accounts for a real estate company, establishing a system for financial reporting receipts, sending rent invoices to tenants, and correctly tracking and billing the appropriate account. Also, it keeps track of regular corporate credit and debit card payments. Finally, it compares sales invoices and bank statements to ensure a clear legal document.
These are some typical bookkeeping tasks involved in the real estate industry:
- Recording financial transactions
- Posting debits and credits
- Producing invoices
- Managing payroll
- Maintaining and balancing ledgers, accounts, and subsidiaries
Accounting is more subjective, providing business owners with financial insights based on information gleaned from their bookkeeping data. A key part of the accounting process is analyzing financial reports to help you make business decisions. The result is a better understanding of actual profitability and awareness of cash flow in your real estate business.
These are some typical accounting tasks:
- Verifying and analyzing data
- Generating reports, performing audits, and preparing financial reporting records like tax returns, income statements, and balance sheets
- Providing information for forecasts, business trends, and opportunities for growth
- Helping the business owners understand the impact of financial decisions
- Adjusting entries
Real Estate Chart of Accounts
A real estate chart of accounts depicts the collection of accounts that support all of its journal entries. However, contrary to popular belief, the most crucial aspect of a chart of accounts is a clear, preferably full, description of the nature of each ledger account. An ideal chart of accounts for a real estate company gives a detailed financial analysis of its operations.
In a chart of accounts for a real estate company, private finances must be kept separate from the business finances.
For a real estate industry, a chart of accounts might include these sub-accounts under the assets account:
- Tenant Improvement
- Telephone Equipment
- Account Receivables
Liabilities account may have sub-accounts, such as:
- Lines of credit
- Payroll liability
- Credit cards
- Business credit
- Security deposits
Shareholders’ equity can be broken down into the following accounts:
- Shareholder Equity
- Initial Equity
- Capital Contribution equity
- Equity draws
- Allocation of earning
- Capital Stock
Expenses account may include the following accounts:
- Auto and travel
- Cleaning and maintenance
- Legal and other professional fees
- Management fees
- The mortgage interest paid to banks
- Other interest
- Depreciation expense or depletion
Revenues account may have sub-accounts, such as:
- Utility payments (pass-through)
- Security deposits
- Parking fees
- Pet rent
- Training Income
- Interest income
- Referral fee
- Real Estate Commissions
Following is the real estate chart of accounts example:
Advantages of Real Estate Chart of Accounts & Bookkeeping
A real estate chart of accounts helps prepare financial statements, such as balance sheets and income statements. Then, various other accounts, such as capital or equity, debt, liability fees, and other expenses, can also be added to the chart of accounts as needed by the real estate company.
Here are the benefits of creating a real estate chart of accounts:
Better Cash Flow
With the chart of accounts, real estate investors can increase cash flow by bringing out rent statements as soon as workable, encouraging renters to make payments on time, and delaying paying contractors until the deadline. In addition, a solid real estate chart of accounts makes it easier to keep control of payables, ensuring that contractors are delivered on time or early to benefit from an early settlement discount.
Controlling Income and Expenses
A real estate chart of accounts usually records income and expenses and provides individualized advice to real estate investors to help them maximize profits. By setting up your chart of accounts, your real estate investment statistics become a reality, providing the position of your rental property and safely and swiftly connecting your bank accounts.
Track the Performance of Your Investment’s Properties.
Maintaining thorough records might also make it simpler to watch the portfolio’s and individual properties’ financial performance. Investors can develop plans to enhance revenues and boost net cash flow by comparing historical rental property statistics to the current year. Tracking the performance can help:
- Highlight the best-performing rental properties.
- Decide whether to hold or sell substandard assets by identifying them.
- Compare financial parameters such as the revenue of interest earned year after year.
- Facilitate the refinancing of a rental property and generate historical property performance data.
Basic Real Estate Accounting Procedures
When establishing a real estate accounting procedures, there are seven essential stages to take:
Choose Accounting Method
Before preparing a real estate chart of accounts, you must choose between accrual and cash accounting methods for bookkeeping. The cash method enables the financial reporting of revenue in the taxation year it is received and the deduction of costs in the tax year it is paid.
In the accrual method of accounting, real estate businesses report their income tax for the year in which they recognize the revenue, regardless of when they receive payment. And they deduct their expenses in the tax year they incur them, regardless of when they make payments.
Differentiate your Personal and Business Finances
Like other industries, the real estate industry also follows the business entity concept while complying with accounting and bookkeeping procedures. While doing this, the owner’s personal transactions are kept separate from business transactions. The business entity concept allows real estate companies to hold separate business accounts. It also allows them to:
- Hold books in order
- Keep your tax returns accurately
- Enhance your cash flow management
- Determine ways to boost revenue and decrease costs
Create a Chart of Accounts
Income and costs are separated using a chart of accounts for a real estate company. Assets, liabilities, equity, revenue, and expenses are typically under several divisions in a chart of accounts for a real estate company. Within each area, accounts are for various operations. For instance, a landlord might have multiple ones for rental income, late fees, and other rent in the revenue column. According to the type of property and the investor’s demands, the chart of accounts changes for real estate.
Follow Up on and List your Expenses and Income
You must classify and record to the property account any money that comes into or leaves your real estate business. The operating system for managing the finances of rental properties automatically tracks revenues and expenditures and classifies them for simple reporting.
The relevant category and account help record the income or expense when a financial transaction occurs. An agile real estate bookkeeping system also enables the entry of transaction-specific information, making it simple to comprehend the purpose of each transaction.
The procedure of balancing makes sure the balance of your bank account in your real estate chart of accounts matches the balance of the bank statement. Your financial reporting system must ensure that all accounts in the trial balance must balance. When finances are reconciling, there could be voids in financial transactions because of posting delays, bookkeeping faults, or a bank error.
Document Management is Key
We should include a backup or supporting document listing every income and expense activity on the real estate chart of accounts. Typical rental property records that a real estate agent should keep track of include:
- Purchase and lease agreements
- Mortgage-related documents
- Vendor contracts
- Bank statements
- Invoices and receipts
- Credit card statements
- Insurance information
- Property tax statements
- Tax returns
Many real estate companies scan and submit each document to a safe, cloud-based backup system on the internet, though some investors preserve paper copies.
A real estate chart of accounts is essential in every aspect, from financial budgeting to financial modeling. Managing properties involves many financial concerns. Also, it’s crucial to handle essential elements accurately, like measuring profits and losses, managing expenses, and assessing a property’s profitability. Therefore, investment company managers, real estate agents, housing associations, and construction enterprises are some major industries that need to implement real estate accounting to grow and make more revenue.
Real estate companies can determine their bookkeeping technique according to their flow of transactions. Bookkeeping and chart of accounts are prerequisites for financial planning.
Your business’s success depends on your business’s finances and creating a model that works for you. And if you have no idea where to start all this, OAK Business Consultant provides full-fledged support in all financial aspects of your business.