Real estate is a lucrative industry, and why not? About 10% of the world’s richest people are in the real estate industry. However, running and managing a real estate business is a complex process. A successful real estate business mostly has multiple properties, which means the business owner has to deal with large numbers in terms of cash or other important accounting figures. If you own a real estate business, you must be already aware that it is not a simple matter.
Before delving into detail about real estate accounting’s importance, let us discuss some potential real estate sectors. If we talk about segments, the real estate sector has the following segments – residential real estate, commercial real estate, and industrial real estate. Even a construction business or business which provide numerous property on rent can be counted as a part of the real estate industry. While the construction sector is a separate sector on its own, many businesses have now started their construction firm alongside providing real estate services.
The need for Real Estate Accounting
Now let’s talk about the major concern– accounting. As a real estate business owner, there is so much that you will have to take care of. While you can delegate a few tasks, that doesn’t mean you don’t need to learn each task’s fundamentals. Real estate accounting is one such process that is vital to your business, understanding of which can help you take full advantage of it.
Real estate business owner requires effective accounting procedures mainly to help them get a realistic and accurate picture of a business financial position at any given point of time to help make sound financial decisions. Regardless of your business size or which sector your business belongs to, having an accurate accounting system in place can help you in various ways in the longer run.
No real estate business owner starts their business to perform accounting & bookkeeping. Additionally, accounting and bookkeeping is a task which is best performed by an expert. The real estate business has a lot to do with the number, and it cannot do without accounting. Use of accounting software is recommended, but performing accounting and bookkeeping without an expert’s help can be a big blunder. Hiring a good accountant and bookkeeper can help you immensely in this matter. It could be costly, and a complex one as the recruitment process is not easy, and getting the right resource is a painstaking task. Another alternative is to opt for outsourced accounting services. It could save you from the recruitment process’s trouble and save you cost on overhead expenses as well.
Real estate is a competitive industry, and to make the most out of your business, you need to take accounting seriously. With the help of proper planning and decisions based on facts and figures of your financial statements, you can build a solid standing for your business.
Key points of real estate accounting you need to pay attention to
- Method of Accounting: For recording all your accounting transactions, you can opt for two methods – cash basis or accrual. Both methods have their pros and cons. Businesses can choose what method best suits them but note that there are some hard-and-fast rules to which method one should apply when it comes to GST registered business.
- Bookkeeping System: You need to set a seamless bookkeeping system in place, whether you plan on manual recording, use of accounting software, or take the help of an online bookkeeping services provider who will do it for you on your behalf. Modern bookkeeping is cloud-based, which makes it easy to update or modify records from anywhere. There is property management software out there in the market for real estate businesses. If your bookkeeping software can integrate with it, then it will be extremely convenient for you. You should do detailed research on which software to opt for.
- Charts of Accounts: A detailed and precise chart of accounts can take you a long way. It will eliminate any future confusion and help reduce error significantly. Make sure each time you make a transaction, it is entered under the appropriate account.
- Records: Accounting records such as invoices, receipts, bank & credit card statements, contracts, leases, and similar documents are useful and is mandatory for taxation purpose as well. You must keep your records safe either as a digital copy, hard copy, or both if possible.
- Value of Stock: Stock in the real estate business are properties, and, the price of your product and services are not fixed. It changes as per the time and market demand. Try to stay ahead of yourself and keep track of the change in the value of your inventory. Also, ensure that you accurately do the property valuation.
- Payroll Compliance: Real estate firms usually have salespeople. They could be working on a commission basis or/and full-time basis. This can make your payroll accounting a bit more complicated. Make use of accounting software which has either built-in or integrated payroll feature.
- Commission: Real estate businesses deal with multiple agents, and naturally, they are dealing with different commission percentages for each commission. There is software that can help you track income and expenses while working through agents. You must collaborate the data from this software with your accounting or bookkeeping software.
- Cost Accounting: Cost accounting for real estate can be a real hassle with expenses like commission, taxes, maintenance, other property fees, along with fluctuating prices of property. Make sure you are aware of every possible expense and its impact on your overall income. While you are at it, ensure that you learn about the tax rate. For example, the land tax rate differs from one state or territory to another.
- Project Accounting: It can be of utmost importance in a sector like the construction business, where projects last for a longer time, and businesses generally deal with multiple projects during a particular time period resulting in voluminous data. In such a condition, general accounting won’t do and you must make use of project accounting and take the help of a project accounting specialist.
Accounting and bookkeeping are complex processes, and it requires experienced professionals to run without a glitch. You need to make sure that the accountant you hire has the real estate industry’s hands-on experience. You can also partner with an online accounting services provider who specialises in accounting for real estate agents or construction businesses. However, it is important to have elementary-level knowledge of such a vital business process like accounting and bookkeeping. Our blogs will help you gain such knowledge as we keep it updating our blog with accounting and bookkeeping-related articles as well as industry-specific information. If you want any information or have any query specific to your business, you can contact our experts and have a detailed discussion.