In today’s technology-driven era, there is software available that can make residential property management so much simpler. However, the person in charge of using the software needs to understand the basic accounting concepts used in the software.
Chart of accounts for residential property management
A chart of accounts (COA) is a financial organizational tool that provides a complete listing of every account in an accounting system. An account is a unique record for each type of asset, liability, equity, revenue and expense. For residential property management it is basically a list of all the accounts related to the property.
The five major accounts typically listed in a property manager’s chart of accounts:
1) Assets – property owned or managed.
2) Liabilities – any amount owed by the property such as loans taken to acquire or remodel the property.
3) Equity – the amount that belongs to the property owner after subtracting liabilities.
4) Income – the amount of revenue generated by the property.
5) Expenses – the amount spent to maintain the property including repairs and renovations.
Other accounts on chart of accounts for residential property management
It is important to keep in mind that while the accounts listed above are the five most common types of accounts listed in a chart of accounts, there may be others. How many there are depends on the preferences of the residential property manager; there is no fixed way of setting up a chart of accounts.
For instance, property expenses can be put into a single account or they can be split into different accounts such as electricity, water and sewer.
Illustration of chart of accounts for residential property management
While looking at the following sample, remember that debits increase the value of the property while credits reduce them.
Sample chart of accounts for residential property management
Bank accounts, accounts receivable such as rent and other amounts owed to the property.
Liabilities (amount owed by the property).
Rent paid in advance, security deposits, accounts payable, loans, credit card balances.
Equity (amount that belongs to the property owner after subtracting all amounts due).
Loans, owner’s equity.
Income (amount earned from the property).
Rental income, late rent payment fees, utility income, income owed from letting out space on the property such as for events.
Management fees, agent rent collection fees, insurance, cost of advertising vacant space or houses to let, cost of utilities, provision for depreciation, cost of repairs and replacement, cost of maintenance such as painting, lawn mowing and gardening.
Accrual versus cash accounting
When creating residential property management accounts, another factor to keep in mind is when a transaction should be recorded. This will depend on whether the accountant opts for cash or accrual accounting.
With cash accounting, income and expense transactions are only recorded when money actually exchanges hands. For instance, you only record income when a tenant’s check for rent clears and expenses when you make a payment. With accrual accounting, you record transactions based on what you owe or are owed whether or not the money has actually come in or gone out.
A lot of residential property management accountants and owners choose cash accounting because it gives a truer picture of the performance of a property in terms of income, expenditure and cash on hand.
It is also important to keep in mind that while you are free to choose the method of residential property management accounting that you prefer, you do need to notify the IRS if you switch from one to another and get their approval.
Son-Rise Property Management is a full service property management company located in Bellingham, WA. Contact us today to see how we can help you find the perfect home to rent or manage your property.