Real estate accounting who practice in the industry evaluates the performance of a business through efficient processes of accounting. These processes help the real estate companies to protect themselves from potential losses while other processes are used to prepare the company for tax recovery and compliance activities.
It is for this reason that such knowledge is important when making decision and planning for businesses. Therefore, the aim of preparing this article is to explain the specialties of real estate accounting and give the tips on how to use the accounting throughout processes in the sphere.
Real Estate Accounting What is it?
A real estate accounting company is concerned with the organization and analysis of its data, in addition to documenting its streams of income and/or outgoings. The real estate industry’s accounting departments should ensure.
That the purchase, sale and rental activities dealing with real estates are recorded. If you work in a real estate or property management company or if you’re an accountant or a finance professional, it is helpful to learn how to do real estate accounting tasks.
How is Real Estate Accounting Used?
Accounting for real estate is commonly used by professionals who manage or operate real estate properties. Individual brokers and professionals who run agencies that employ multiple agents may be referred to as real estate businesses. Accounting techniques for real estate companies enable them to assess their financial performance and growth and to manage their taxes in a cost-effective manner.
It is also important for real estate professionals to be familiar with accounting techniques associated with transactions, since they may be involved in large-scale transactions when helping clients to purchase or sell real estate.
Other professionals who work within or alongside the real estate industry may also require real estate accounting. A number of professionals are included in this group, including owners of construction companies, managers of housing associations, and real estate investment managers.
Accounting for Real Estate
Business transactions have a wide impact on accounting in as much as it impacts the following aspects. Accounting for real estate businesses should take into account the following concepts:
Assets: Assets are resources which are owned by the company or individual and can be easily exchanged with the cash. Property that you assign to a property management accounting company is a form of an asset.
Liabilities: A company or individual’s assets are responsibilities of the individual like mortgages. This means that between the current liabilities and the fixed liabilities a clear distinction has to be made. We should also have into perspective that while current liabilities are those whose payment are due within the current year, fixed liabilities are those whose payments are due after the current year.
Equity: A company equity is the asset less its liabilities whereas home equity in real estates is the value of the house less the amount that is financed or the mortgage balance. Therefore there will definitely be an estimation or determination of amounts that the company is worth.
Income: Compensation is the amount of money a company, or an individual earns in performing a particular job or duty. One example here is that property managers get their income from the rent collected from their clientele.
What You Need to Know About Expenese
While so engaging in business, use a cost referred to as charge. Another cost that real estate companies may bear includes training sessions for its brokers and the costs of maintaining tenants’ premises. As far as the purpose of every transaction that is recorded in the accounts is concerned, the accounts should be balanced.
Therefore total amount of your assets will be equal to total amount of your liabilities and equity. It is to be noted that accountants need to possess some knowledge about GAAP as well as the functions of GAAP. Using the accounting software programs, this process is well eased and well explained.
Tips For Real Estate Accounting
Follow the following tips to keep accurate financial records in a real estate company:
Choose an Accounting Method
It is a decision that has to be made on which accounting method has to be adopted when reporting for a company’s financial records. Cash-basis and accrual based accounting are the examples of accounting.
When you post transactions in an enterprise’s cash-basis accounting system, you capture money transacted between your business and another party. You are paid by a third party and also pay that third party in transactions that happen in these areas.
In accrual accounting basis, a transaction is recognized when you exchange a product or service with another part. For instance if there is an invoice, it is likely to be recorded when the invoice is generated or the company receives it or any other time as may be required.
As much as both methods of accounting has its own benefits, it is worth to note that cash-basis method is slightly easier for small business to employ than accrual accounting since the latter highlights existing business transactions and expected payments in a detailed manner useful for large business. You can not switch between the methods once they have been selected regardless unless you request that the I.R.S transforms it.
Separate Your Expenses
Real estate business expenses should not be paid out of the pocket, rather they have to be charged to the business bank account. Specifically, the necessity to have a single location for all the business expenses that does not merge with personal ones.
Thus, with the help of it, all the necessary expenses and transactions connected with the business will be monitored, which will allow to determine a cash flow or growth of the business. More over, you can increase the precision of bookkeeping by categorizing financial data.
Organize Your Business
Organizing financial documents is essential to effectively managing real estate accounting or bookkeeping responsibilities. Organize and find documents effectively by using an effective filing system. In accordance with your preference, it is possible to maintain these documents either physically or digitally.
By utilizing digital files, it becomes easier to share documents, as others can access them from anywhere. Keeping these documents organized is crucial since management may need to refer to them at some point in the future. Among the many tasks they may need to accomplish are preparing their taxes or verifying their financial information.
Maintain a number of documents, including:
- Contracts and leases related to real estate
- Invoices
- Receipts
- Tax returns
Maintain Accurate Records
It is important for accountants to ensure the accuracy of business transactions in addition to recording them. Conduct a monthly reconciliation of the business bank account to accomplish this. It is necessary to conduct a bank reconciliation to ensure that the bank records and the business records are accurate. Show money entering and leaving the business in the same amount.
When you perform the reconciliation, you may discover discrepancies as a result of accounting or banking errors, fraudulent charges, or delays in processing. If your bank has not yet processed a transaction, the balances may not be aligned. You may need your financial documents to correct discrepancies or verify gaps as a result of this process, so it is important to organize and save them.
Make Use of Digital Software to Increase Efficiency
Making your record-keeping processes more efficient can be achieved by incorporating digital software and applications. It is possible to access your accounts from a variety of devices thanks to the cloud-based nature of many programs.
In addition to increasing security when storing important documents digitally, requires a passcode for accessing the documents. Accounting practices such as receipt tracking are essential to the operation of a business. Online applications provide the ability to scan receipts immediately.
Accounting tasks can also be simplified or automated by using software. If you do not have extensive experience with accounting, these resources can help you understand these responsibilities. Additionally, most software offers a way to ensure compliance with relevant tax law, although it is advisable to have an accountant review your work before submitting it.
Researching the different accounting software available for real estate businesses can be helpful. You can also visit our social media page.
Utilize The Services of a Professional
A specialist professional may be able to provide you with additional assistance when performing real estate accounting for a business. Some accountants and firms exclusively perform the accounting for real estate and property management businesses.
These professionals typically possess familiarity with all relevant rules and regulations established by local and state real estate commissions. A qualified professional can assist you in understanding how the rules might affect your business or accounting practices.
Additional business advice is available from real estate accounting professionals, such as tips on effective financial management.
