A good set of accounting records is necessary if you ever get selected for a tax audit. Therefore, it’s important to at least get some of the basics down in real estate accounting.
First, you’ll need to choose an accounting method. The two most common types of accounting methods are cash and accrual. Depending on which method you pick will determine how transactions are recorded.
When you use the cash method, the income is reported in the tax year it is constructively received and expenses are deducted in the tax year they are paid.
Under the accrual method, you’ll report income in the tax year it is earned (regardless of when the payment is received). Expenses, under the accrual method, are realized when the expense is incurred (regardless of when the payment is paid).
Got to Keep Them Separated
You probably have heard this many times already, but you should keep business and personal expenses separated. The term that is commonly used is commingling. You want to avoid commingling. This is easy to accomplish if you set up a business bank account to run the real estate business transactions through.
Chart of Accounts
The chart of accounts is the listing of accounts your accounting records will use. They usually consist of assets, liabilities, equity, revenue, and expenses. Depending on which software you use, you can create sub-classes to help track transactions by property (or unit).
In future posts we’ll go into more depth on the basics to real estate accounting.