While it may seem daunting to those who are new to the industry, accounting for property managers is really no more complicated than accounting in any other industry. That said, there are some specifics you need to be aware of to ensure you’re doing your due diligence.
If you’re just getting started in property management accounting, you’ve come to the right place. In this article, we’ll take a close look at the terminology and all the unique aspects of accounting in this industry that may be new to you. We’ll also give you some actionable advice on how to create an accounting structure that’s both easy to implement and maintain.
The basics of accounting for property managers
In order to understand property management and bookkeeping, it’s important that you first take the time to learn what all the terms you’ll come across mean so you’ll be well prepared to engage with them when the time comes. Here are five essential terms to familiarize yourself with as you venture into the world of accounting for property managers:
- Accounts payable: This term refers to what your company owes to all the vendors or suppliers with whom you work for the goods, services or materials they’ve provided, and which you have not yet paid for. Most property managers purchase accounts payable software to manage and simplify their accounts payable.
- Accounts receivable: Simply put, this is the opposite of accounts payable—all the income you’re currently owed as a business owner. As a property manager, this includes rent from your tenants, as well as any other invoices and unpaid fees you’re owed.
- Bank reconciliation: As a property manager, it’s important that you routinely examine your general ledger, a record of all your business transactions that is also referred to simply as a G/L, to ensure it reflects the same information as your business bank account’s statement balance. If you find there are discrepancies, it’s essential to identify where things went wrong and rectify the issue before it snowballs.
- Assets: An asset is anything you own that has value. As a property manager, this could include all your properties and land, the equipment and tools you use to maintain them, cash deposits, as well as any other accounts receivable your business accrues.
- Net profit and loss: Net profit and loss tell you exactly how much you’ve profited or lost as a business owner. While your financial statements will include a variety of different numbers, the net profit and loss strip out all the other variables that are considered to show exactly how much you’ve earned and lost, after taking into account all other costs and earnings in your business. They show the final picture in either category.
The complete lexicon for property management accounting is large, but the above list gives you a taste of the terms coming your way in this line of work.
Accounting for Property Managers: Best Practices
You will inevitably encounter situations and instances in your property management accounting and bookkeeping journey that will try and challenge you, no matter how well prepared you are at the outset. But there’s a wealth of knowledge and insight that will help you start on the right foot. In order to set yourself up for success in these potentially uncharted waters, here are our property management accounting best practices to help you set up an accounting system that is effective and sustainable:
Open a bank account for business transactions
While you may initially feel like your business isn’t large enough to warrant its own account, creating a separate account for any money coming in or going out related to your property management work is essential. Not only will opening a business account give you access to professional resources and support that will help you along the way, but it will also make it much easier to accurately reconcile and monitor your business expenses monthly, quarterly and annually. If that’s not incentive enough, the IRS will also be dissuaded from giving you trouble for running business expenses through a personal account.
Determine which accounting approach is right for you
In property management accounting, there are two primary methods to consider: accrual or cash accounting. While each has its benefits and drawbacks, carefully considering each option and knowing how you want to proceed at the outset of your business will make things easier for you down the road. Here are the general considerations to weigh in your evaluation:
- Cash accounting: In this approach, you record each sum of cash sent or received, whether it be from the purchase of a property, received rent, or another service you provide to your tenants as their property manager. When you receive rent each month, for example, you would log each payment as an entry in your accounting program. For small businesses and sole proprietorships, this is an easy method to choose. However, if you have employees to pay each month, it can become a bit more taxing.
- Accrual accounting: In this method, rather than recording when money is delivered or received, you record when the transaction occurs. For example, when a tenant pays their monthly rent, you record that month’s payment as a transaction. However, if a tenant pays for six months or a full year of rent upfront, you still only record the transaction for each month’s rent, even with the lump sum in your account. If you have employees on payroll, this is the approach you’ll want to choose.
Create and chart your business sub-accounts
As an entrepreneur, you’ll likely need to establish sub-accounts within your bank account in order to clearly see your expenses and set yourself up for long-term financial health. Now that you’ve opened a bank account for your business and decided which accounting method you’ll be using in your company, you’ll need to lay the appropriate groundwork in your bank accounts.
A chart of accounts is the organizational structure of your bookkeeping as a property manager, helping you keep your money organized and simplifying account reconciliation practices each month and year. The chart is essentially a list of all the accounts your property management business uses, including:
Your accounting practices will center around this chart of accounts, with each business transaction recorded in one of these areas. Establishing all these accounts allows you to create reports you’ll need, assess your overall financial health, and plan for growth in the future.
Choose an accounting software to streamline and simplify your work
No matter how small your operation is, running a property management operation requires a great deal of time and effort, and you’ll have a lot of balls in the air at any given time. Needless to say, if you’re not careful and organized, things can slip through the cracks.
To make your accounting and bookkeeping easier, selecting an accounting software to help you automate, organize and reconcile your finances each month will save you time, money, and headaches through the years. There is no shortage of products available to do this, and choosing one will depend largely on your unique needs and budget. Consult with a professional to identify which product will work best for you—ideally, one that integrates with your bank and accommodates the types of transactions you routinely conduct.
Lay a strong foundation
The best step to take for your long-term success as a business owner is to find a bank that knows how to support you. At NorthOne, our team is uniquely qualified to help entrepreneurs navigate the logistics of opening and organizing their business accounts—it’s why we started our business.