Sinking a lot of time into property management accounting probably isn’t the reason why you participated in property, either as a specific or limited company. Regardless, you’re accountable for some basic accounting.
But if you’re new to property management accounting, you might not know where to start, so we wrote this beginner’s guide to help. Let’s get started!
What does property management accounting involve, and why is it important?
Property management accounting is the process of handling and recording financial transactions related to a property. This contains rent payments, expenses related to maintenance and repairs, as well as management costs.
Accounting is vital for success in the world of real estate; it allows a landlord or property management company to monitor their income and expenses, ensure compliance with tax regulations, and maintain their financial health.
It’s also crucial in reducing the amount of money you owe to HMRC, as it’s only through property accounting that you can positively claim for tax deductions.
Accomplishment started with property management accounting
Accountancy isn’t something that you can simply walk into without knowing the basics. But if you have a knack for numbers and the time and patience to study, you can get started pretty quickly by yourself.
The following are the necessary steps to get started:
Make a budget
Creating a budget should be high on your list of priorities. This includes estimating your income and expenses for the year and taking into account factors such as rent, maintenance costs, property taxes, insurance, and utilities.
Doing this will give you a strong idea of your financial circumstances and help you plan for the future.
Open a separate bank account
If you haven’t already, it’s a good idea to divide up your personal and corporate bank accounts. That way, it will be easier to track your income and expenses, and it will be easier to claim tax deductions for every single business expense.
Pick an accounting method
Sole traders and partnerships prepare their corporate accounts and calculate taxable profits by using one of two methods: the cash basis or the accruals basis.
The accruals basis recognises revenue and expenses at the time a corporation earns or incurs them, regardless of when compensation is actually received or made.
This is in contrast to the cash basis. Revenue and costs are only recorded in this system when cash is collected or paid.
While the cash basis is simpler and more straightforward, most industries and accountants agree that the accrual basis is better because it presents a more accurate picture of a business’s finances over a long period of time.
Now it’s time to record all financial dealings related to your property management corporation.
There are two types of transactions: accounts payable and accounts receivable, which basically mean expenses and income in accounting terms.
To help you do that, make sure you record all your transactions as they arise. Otherwise, you’ll have to catch up on your bookkeeping, which can be time-consuming, especially if you’ve misplaced some receipts and invoices.
You might also want to consider a property management accounting software system, which can ease the procedure by automatically transferring and sorting information from scanned documents. Otherwise, you can use regular worksheets to manually record your transactions.
Bank reconciliation means checking your recorded transactions against your bank statements to ensure they match. Doing this helps classify errors and guarantees that your financial records are precise.
Again, you can do this manually or use property management accounting software, which will help you rapidly check the figures.
Prepare financial statements
Preparing financial statements is an important component of property management accounting since they should accurately reflect your financial health and allow you to make informed decisions. For the same reason, investors will be very interested in your financial accounts if you own a property management company.
Financial statements are classified into three types:
Balance sheet. This records your assets and liabilities to analyse how much money would be left over if your corporation went bust tomorrow (known as equity).
Income statement. Also known as the profit and loss report, this shows your net income over a certain period of time.
Cashflow statement. This breaks down your cash flow to provide valuable info about your liquidity and ability to meet financial responsibilities.