Real Estate Accounting Basics – What to Track?
Real Estate Accounting Basics – What to Track?
Accounting for real estate is an overwhelming and tedious task. There are numerous assets, listings, finances, clients, business networks, etc., to manage. Although the core operation of a real estate business lies in connecting, selling, and closing sales, real estate accounting also plays a significant role in its quest for success.
Accounting for real estate goes beyond tax compliance and preparing financial reports to accommodate better financial decision-making, increased cash flow, and improved asset management. It allows individual owners to secure their finances and stay organized. Since several regulations and changes hit the industry constantly, firms have to keep on their feet and prepare for whatever may occur. Also, the myriad of transactions can affect your accounting and bookkeeping. Therefore, you must know the basics in accounting for real estate and use them to track significant activities.
Significance of Real Estate Accounting
Like accounting for other industries, accounting for real estate serves the purpose of providing financial insights. It ensures compliance with taxation laws and prepares financial reports for stakeholder consideration. Besides these general points, other vitalities of real estate accounting include:
- Gain a clear perspective of your financial health
- Tracking business growth in different years
- Managing cash flow
- Alerting when red flags occur
- A streamlined process enabling timely tax return filing
- Managing payables and receivables
- Quick and accurate reporting to shareholders, investors, lenders, government agencies, etc
The fundamental elements a real estate tax accountant near me must track in real estate accounting include:
- Assets: Assets are economic resources that provide benefits and uses to the owners. As long as it generates cash for the company, it is a good asset. Their classification includes:
- Fixed assets: Fixed assets Are those that provide benefits for more than one year. For real estate companies, their principal assets are properties.
- Current assets: Current assets are short-term assets that easily convert into cash. For real estate firms- accounts receivable from customers is one such asset.
- Liability: Liabilities are debt obligations of a company to meet. The owed money classifies as:
- Non-current liability: Non-current liabilities are debts owed for more than a year. For example- mortgages.
- Current liability: Current liabilities are debts for repayment within a year. These may include accounts payables.
- Equity: It shows the owners’ share and value after settling assets and liabilities. It is the difference between assets and liabilities.
- Equity= Assets- Liabilities
- Separate owners will have a different share.
- Income: Charges received for providing a product or service refer to income. In accounting for real estate, income may come as the rent charged to tenants.
- Expenses: Aside from the debt, charges paid to run a business constitute expenses for the company. It includes administration overheads, salaries to employees, etc.
- Apart from the five primary elements, accounting for real estate comprises significant transactions to track. These include:
- Commission income: Real estate agents’ primary source of income comes from closing deals and generating commission income. Therefore, they must monitor, track, and maintain an accurate record. Instead of tracking commissions separately, use accounting software to integrate the system.
- Association fees and expenses: Depending upon the employment of a real estate agent, he may have to pay a brokerage fee to the firm. Also, they have to pay association expenses to be members of a particular body or organization. These values come under the expense category and are available as deductions.
- License and education costs: Real estate is a dynamic market, requiring real estate agents to stay updated and educated about the changes. These situations lead to expenses on continuing education. Also, they may require getting a renewed license to continue their operations. These constitute expenses for the company.
- Office or administrative overheads: Although the nature of a real estate person may not signify using an office, they do require supplies, equipment, administrative tools to carry out functions like accounting. Cleaning, maintenance, office rent, and event space are other overheads at a large scale. Although mobile operations are increasing, we cannot eliminate the scope and amount of such expenses from accounting for real estate.
- Marketing expenses: A real estate agent spreads awareness about their offerings and offers to generate sales through marketing expenses. These include:
- Website creation and development
- Social media management
- Print and news media advertisements
- Online and digital advertisements
- Business cards
- Event sponsorships
- Travel, mileage, and transportation: Managing your properties, going from place to place to sell, client connection, and monitoring the network of properties requires considerable time and travel. Therefore, these expenses become a significant portion of real estate debits accounting.
Once you become familiar with the fundamental elements and transactions to track in accounting for real estate, you must know the best way to handle them. The following tips might assist you in managing your real estate accounting well and remove any roadblock or confusion that might hamper the company’s potential growth.
- Review your accounts monthly to prevent any irregularities and fraud possibilities
- Ensure data accuracy for reliable financial reporting
- Keep business, and personal funds separate to avoid complexities in accounting for real estate
- Itemize or categorize your incomes and expenses to get maximum advantage
- Know and comply with state, local, and regional regulations
- Always maintain a backup for your data and files to avoid loss or security attacks
- Itemize categories only if you know; otherwise, ask a professional to help
- Hire experts to manage numerous transactions and communicate your needs clearly
- A solid accounting program or outsourcing is a safe bet to simplify complexities in accounting for real estate
Conclusion:
Accounting forms an integral part of every organization since it assists in managing the bloodline of the business. As a real estate owner, even if you have accounting knowledge and background, try to hire outside help as doing everything on your own can lead to impediments.