Listen to this articleSimilar to other forms of business and trade, the real estate industry also heavily relies on accounting. Real estate accounting is similar to but differs from the accounting in small businesses and large enterprises.
Moreover, it can be intimidating and overwhelming for self-employed individuals in the real estate industry.
Real estate accounting has great significance for agents, brokers, and business owners. While most business owners find the accounting least enjoyable, it is still essential to have the accounting skills for the success of your business.
With real estate accounting skills and knowledge, you can track income expenses, evaluate earnings, benefit from tax deductions, and more.
Therefore, if you rent out your property or own other kinds of real estate business, you need a sound understanding of the real estate accounting involved.
This will allow you to carry out basic accounting operations through software, comprehend financial records, and work with and lead hired accountants.
What is Real Estate Accounting?
Real estate accounting is the act and process of tracking, recording, analyzing, and reporting financial transactions for a real estate business.
This entails keeping accurate records of transactions, income, and expenses and ensuring compliance with the applicable laws and regulations in the jurisdiction the business falls under.
It also entails monitoring gross commission income, keeping tabs on expenses and net income, estimating tax obligations, learning about the company’s performance, and maintaining the core operations.
The Importance of Real Estate Accounting
When it comes to real estate, accounting might not be the most important skill. However, it is still compulsory to have a working knowledge of real estate accounting for agents, brokers, and business owners in this industry.
Regardless of whether you perform small sales or work for large corporations, accounting stays crucial.
With the help of accounting, you can better manage the cash flow and track income and expenses precisely. Real estate also helps you to streamline operations like invoicing, taxation, etc.
Moreover, you can compare business growth over the years and gain a new perspective on your business finances.
Core Elements of Real Estate Accounting
Real estate accounting is a broad domain that includes tasks like bookkeeping, business taxation, tax accounting and advisory, financial reporting, audit and assurance, budgeting and cost analysis, cost control, tracking income and expenses, etc. Let us take a look at these tasks separately.
1. Bookkeeping
Bookkeeping entails tasks like recording financial transactions, invoicing, maintaining company accounts, performing bank reconciliations, and more.
The bookkeeper maintains accurate records, laying a foundation for real estate accounting operations.
The bookkeeper is also responsible for performing payroll operations such as sending paychecks to the employees.
2. Tax Planning and Advisory
The real estate business must file compulsory tax returns with supporting financial documents. This requires the business to calculate taxable income, tax credits, and tax bills, optimize tax deductions, and prepare accurate tax returns.
However, reducing the tax cost and ensuring compliance requires initial business tax planning.
This is why businesses conduct corporate tax planning to prepare a fail proof tax strategy for the financial year.
3. Tax Accounting and Preparation
Tax accounting means calculating the required taxable income, applying deductions, tax credits, and concessions, and determining the final tax bill.
The real estate must calculate the taxes, prepare tax returns, and file it with supporting documents.
4. Budgeting
Budgeting is vital whether you are starting a new project lineup, launching a product, or evaluating the budget for the financial year.
However, evaluating the budget is complex and requires a comprehensive knowledge of the business operations, assets, liabilities, and objectives. Evaluating the budget in different contexts is an essential task in real estate accounting.
5. Financial Reporting
A business, small or large, needs mandatory financial reports and statements such as the balance sheet, income statement, and cash flow statement.
The accountant must prepare these statements and communicate them to the management.
These reports help in business analysis, decision-making, evaluating profitability and productivity of the company, and presenting its accurate picture to the stakeholders and investors.
6. Audit and Assurance
Audit and assurance play a crucial role in real estate accounting. The financial audit evaluates the correctness of the financial records and generates its opinion on them.
It is essential to check the accounting operations for scope for improvement and to prevent incompliance and litigation.
Assurance services provide business suggestions on how to improve the efficiency and sustainability of the business.
7. Cash Flow Analysis
Cash flow comprises income and expenses, i.e., cash flowing into and out of the business.
However, careful analysis of income and expenses requires the business to record the transactions accurately.
This is why cash flow analysis directly relies on bookkeeping.
Cash flow analysis measures the business expenses, revenue, and profitability of the company. This requires establishing cash flow metrics and KPIs and monitoring them closely.
8. Cost Control
Cost control in real estate mainly stands for operational costs. It entails calculating the operational costs, finding the scope to reduce operational expenses, and minimizing the overall cost.
Moreover, cost control in real estate accounting also requires the business to develop strategies and implement them to reduce the overall cost.
9. Investment Analysis
Although it is the management and business owners who make the decision, accountants conduct investment analysis to find potential investment opportunities.
They then suggest the management for making profitable investments and use financial projections, market analysis, and property appraisals to back their research.
Real Estate Accounting vs Bookkeeping
Real estate accounting and real estate bookkeeping are two core financial operations a business in the real estate industry needs. Accounting needs accurate records of the transactions, which bookkeeping makes possible.
Bookkeeping is recording or making a journal entry of all the transactions the business undertakes or performs in the financial year.
It includes recording journal entries, tracking payments to vendors and recurring payments, and invoicing the tenants.
Moreover, the bookkeeper must ensure that the entries and changes are correct and accurate. The bookkeeper is also entrusted with charges like debit and credit charges.
When the business hires staff or employees and needs to send paychecks, the bookkeeper is responsible for performing the payroll operations.
Explore More: What are the Benchmarks of Day-to-Day Bookkeeping in the Company?
Getting Started with Real Estate Accounting
Beginning with real estate accounting for your business is not difficult if you have the right guidance. Therefore, we have compiled a stepwise approach to lay down the foundation of real estate accounting.
Follow these steps, and feel free to drop a comment if you feel stuck or have a query.
1. Begin with an Accounting Method
The foundation of real estate accounting is laid down when you choose the accounting method for your business. There are two accounting methods widely used – cash accounting and accrued accounting.
Cash accounting registers cash when the business receives it, regardless of whether the products or services have been delivered or not.
However, accrued accounting only registers revenue once the product or service has been delivered to the client or customer; until then, it stays a liability.
Both methods of accounting have their importance and downsides. Therefore, choosing the right accounting method that fits your business requirements is essential.
2. Set a Separate Business Account
Personal expenses or funds cannot be mixed up with the business, for they bring inaccuracy in financial reporting and analysis.
Therefore, you must set up a separate business account in the desired bank and use a business card for all business expenses, including the negligible expenses for food for employees and business travel.
Moreover, allocate separate funds for the business and don’t pay for the business expenses with your personal funds, as this hampers cash flow analysis.
3. Prepare a Chart of Accounts
A chart of accounts lists different business transactions into separate accounts depending on the category in which they fall.
The categories are made depending on the purpose of the transactions. The chart of accounts for a real estate business lists assets, liabilities, equity, revenue, and expenses.
4. Itemize Business Transactions
As an accountant, you must itemize the business transactions into subcategories according to their purpose. These items help in tracking the expenses, preparing taxes, and ensuring compliance.
5. Perform Monthly Reviews
Preparing end-of-the-month reports is a crucial part of real estate accounting. Moreover, you must monitor the cash flow metrics, KPIs, and internal controls and find the scope for improvement in the interest of the business.
Additionally, the accountant must prepare quarterly and annual financial reports and file estimated tax returns.
Outsource Real Estate Accounting to Us!
The above guide on real estate accounting will equip you with the knowledge you need to conduct in-house accounting operations for your business.
However, in-house accounting has disadvantages, such as additional expenses of hiring and maintaining an accountant and decreased quality due to limited skillset and technology.
The world is shifting to a custom of outsourcing real estate accounting operations to a firm.
Our outsourced accounting services are supported by our team with years of experience and the latest accounting software and tools.
This allows us to deliver rich-quality accounting services to real estate businesses at an affordable rate. Dial +1(800) 580-5375 now and take a free trial of our accounting services