The Ultimate Guide to Property Accounting for Beginners

Today’s lucrative real estate market has become the talk of the town. Besides offering massive returns in the form of returns, investors enjoy massive capital gains on properties. As a result, many individuals are looking to invest in this industry, unfolding opportunities for real estate agents. They have numerous listings of residential and commercial properties, perfect for modern-day investors.

However, real-estate knowledge won’t suffice to thrive as an agent in the real estate industry. It involves financials, state regulations, taxes, and much more when dealing with properties. If you find it arduous to get hold of the accounting part, improve your number game before it becomes an obstacle.

As a property dealer, begin by learning the basics of property management, which involves a substantial amount of money. You can learn to track and record client transactions to comprehend the accounting mechanism. Understanding property accounting can go a long way in running your real estate business. You can manage the books, monitor progress, and calculate tax returns.

Let us show you the ropes if you wish to thrive as a property dealer. Here is the ultimate guide to property accounting for beginners.

Understand Property Financials

Unlike a company’s financial statements, property financials go beyond assets and liabilities. It comprises documents outlining the property’s financial position, status, and performance. It allows property dealers to evaluate how much return the property can generate, its market value, and resale prospects.

Similarly, financials will allow you to assess whether the property has been leased before or not. In the case of leasing, you must look into real estate lease administration to manage leasing financials while ensuring compliance with accounting standards. Getting into these nitty-gritty details is crucial to ensure the property is ready for sale.

Lastly, select the correct accounting treatment for your business. Unlike established companies who follow IAS 16, you must adopt IAS 40 for investment properties to ensure business financials are up to the mark.

Learn the Five Accounting Elements

In the real estate world, experts use the five accounting elements repeatedly. Hence, make sure you have a solid grasp of these.

1.       An Asset is a term for possessions of a company that helps generate profits and income. Assets are of two types – fixed and current. However, in real estate, we have another category labeled as principal assets.

2.       Equity is the amount of money invested into the business, determining its value. Accountants can calculate it by deducting assets from liabilities. If real estate agents have invested a different number of equities, then a separate accounting process is applicable for each one.

3.       Liabilities are sums of money owed by the company. There are also two types – non-current liabilities, which include loans and mortgages, and current liabilities.

4.       Any amount paid for businesses is an Expense. Being a real estate firm, the salary paid to agents or your rent for the office space could be your expense.

5.       Income is the money you receive by providing a good or service. In real estate, income is earned from commissions by selling properties or the rent received from tenants.

Leverage a Savvy Software

While managing property accounting is challenging, manual bookkeeping can further complicate processes. Therefore, leverage savvy property management accounting software and keep track of all transactions. It enables property dealers to set up each property separately on the system. You can add details in every property, such as bank account, rent roll, etc. The software will prepare all reports, giving you an overview of all transactions.

Further, you can also receive rent through the software by integrating your business bank account. Likewise, you can process invoices, reconcile bank statements, and print financials by tapping on the screen. The minimal human involvement in this process will eliminate the chances of errors, ensuring all accounting records are accurate and reliable.

By now, you would have developed a generic idea of property accounting. Now, it is time to get into the technical details, which include regulations and property taxation.

What are Property Accounting Regulations?

All real estate agencies must comply with the accounting standards mandated by the government. The purpose of these mandates is to ensure investor protection and promote equal distribution of wealth. Further, regulations also help in maximizing the contribution of the real estate industry to the economy’s GDP. Now the question is, what are property regulations?

The Financial Accounting Standards Board (FASB) provides accounting standards in the United States. Similarly, International Accounting Standards (IAS) are followed in the United Kingdom. Depending on where your business operates, integrate the accounting standard that best aligns with your business.

Most businesses record property as a fixed asset in their financial statements, which is a violation in real estate companies. As you deal with properties, it becomes your current asset, which means you must record them as a part of the inventory. Following the correct accounting principles will keep you from hot waters and unexpected audits.

How to Manage Property Taxes? 

Undeniably, taxes have always been a hassle for business owners. Despite having multiple tax categories, they find it arduous to keep up with changing tax brackets. The real estate business is no different. You will be liable for all property taxes alongside income and corporate tax. So, how do you manage taxes? Firstly, familiarize yourself with different types of taxes.

·         Personal Property Tax is payable on movable property such as vehicles, equipment, and furniture you place in furnished properties.

·         Capital Gain tax is the tax charged on an asset’s sale. Depending on the asset’s life and scarp value, you must pay tax on the excessive amount.

·         Rental tax is payable on the rental income earned from tenants. However, rental properties can save you ample money on taxes. You can deduct depreciation, maintenance, and repairs and get an exemption from the capital gains tax.

Once you understand which taxes apply to your business, start accounting for them. In addition, emphasize essential accounting practices to maximize your tax savings.

Final Thoughts

Truthfully, accounting has always been an integral part of every industry, and real estate is no different. Without accounting practices, managing transactions and gauging the business's progress is impossible. Therefore, anyone wanting to prosper in this industry should develop a solid understanding of property accounting. Accounting is vital for property management, from taxation and accounting elements to property financials. Therefore, learn the ropes to set your real estate venture on the path of success.