Written by: Eric Davis
The basics of accounting and bookkeeping are crucial in maximizing profits. Understanding how each transaction and decision can affect your investment is extremely beneficial in laying plans and decisions. What is the difference between the two, and how do they relate?
Bookkeeping is the collection of your business’s financial transactions, while accounting centers on a bigger scale, such as financial evaluation, determining issues that need to be repaired, identifying improvements, and preparing for future developments.
Bad bookkeeping and/or accounting practices can result in lost rental income, overpayment of taxes, higher expenditure, and low ROI. Proper rental accounting and a well-founded bookkeeping system are pillars of a rental property business. It helps produce returns from rental properties and encapsulates tax benefits presented by IRS.
BASICS IN PROPERTY ACCOUNTING
Like any other business, the fundamental law in property accounting is to present all your earnings and costs properly, legally, and accurately. To successfully build up a bookkeeping system: landlords, investors, or property management companies should set a couple of things. Below is the list:
1. Business and Personal Finances should be set apart - Guaranteeing that your rental property financial movement is kept separate from your other investments, especially from your personal funds, is the first step in making a proficient and viable investment property bookkeeping framework. Whether you own just a single property, opening a different business checking and bank account is necessary. Additionally, ensuring all flow of transactions goes through the individual bank accounts will help you minimize the work when ledger reconciliations are needed. Moreover, you will be able to identify issues in particular properties easily and will be able to tell if you are earning or taking a loss.
2. Monitor Expenses Real-Time – Neglecting to document expenses or doing the bookkeeping later is one of the most common issues most landlords experience. This oversight costs many dollars and creates unnecessary and exhausting work. In any case, you will require a dependable method for following the flow of your finances. Some make their finance worksheets, and others rely on online accounting software like QuickBooks, Rental Property Manager, Buildium, and AppFolio. Either way, one should ensure everything keeps monitored to avoid future dilemmas.
3. Using Accrual or Cash Basis Method-Implementing what accounting method to use is another step in tracking your rental expenses. The strategy depends on your inclination and what’s best for the business. If you prefer recording the earnings and payments as they happen, you can utilize the accrual method. However, you can use the cash basis method to monitor the expenses and incomes when they hit the account.
4. Use Automated System -Landowners who manage more than one property deal with different loan installments and insurance payments every month—setting up automatic payments instead of manually making bookkeeping more manageable. Various tools and applications have been created to enhance the accounting process.
5. Use the Modern Technology – We are now in the 20th century, where everything is almost digitized. Before this, everything depended on paper, including rental properties. But nowadays, business owners firmly reinforce using digital accounting and bookkeeping. Digitization includes scanning applications for receipts and invoices, accounting software in bookkeeping, and online file storage. Digitization helps get all your files in one place, making the process easier.
An image showing different tax forms.
6. Understanding Tax Forms-It is best before you start your business to have basic tax knowledge, and this includes understanding the forms that might be helpful and useful to the company. In doing so, rental property accounting will be more accurate and easier to process. You can start with W-9 and 1099 forms but be ready to learn more about these and other types of forms along the way.
7. Certified Public Accountant – Hiring professionals like a CPA is one of the smartest choices you can make in this line of business since they are more experienced and more familiar with accounting systems. They can direct you properly on how you can approach and analyze your finances in the best way possible. As well as assist you when tax season arrives.
After collecting all necessary details and documents of your rental property transactions, the next step is to do the organization and categorization task. This will help you generate reports to determine how well your business is performing and helps you with tax purposes.
Please see below the reasons why rental property accounting is important:
- Ability to oversee profits from your rental properties
- Analyze monetary flows to determine how well your rental properties are performing financially
- Ensure deficits are being paid by tracking accounts payable properly
- Make financial documents like balance sheets to review rental performance and be able to prepare for future investments
- Tax preparations will be more manageable because generating reports can be easy
It does not matter how prepared you are; unexpected expenses like appliance replacement and varying maintenance costs will always be unforeseen. Investment and financial crises are always linked together. These are some of the issues that can affect your accounts and budgets. Managing your statements and planning your bills properly will avoid many financial problems and guarantee profits.
It is a stressful and risky job to manage finances; however, it will provide multiple benefits and advantages to your investment if done correctly. Davis Property Management will help you with this process all the way. We understand that service is a state of mind as an intangible product. We are committed to the tasks and consistently go beyond what is required in a professional and approachable manner. Call us now at 425-658-7471 or send us an email at firstname.lastname@example.org.
For more accounting information, please watch the video below.
Davis Property Management
At Davis Property Management, we provide fast, friendly, and professional service tailored to your individual property management needs.