Accounting for Real Estate Rental
With the increasing daily necessities of an average person, his expenses are increasing day by day. To meet these expenses, one of the most preferred choices these days are ‘INVESTMENT’. Apart from the regular paid jobs and businesses, investment not only helps you earn extra benefits but also gives you a sense of financial security as a backup income. Among all this, the ‘Rental Estate Business’ is flourishing rapidly by proving to be a great revenue generator, as for both short term and long term basis.
What is 'Real Estate Rental'?
Real Estate Business is basically giving on lease or putting on rent a property or part of property, mainly a single house, flat, apartment, duplexes etc., by any corporate professional or any organisation, in order to generate revenue. The main idea of these corporates is solely for investment purpose.
Why Should One Go for 'Real Estate Business'?
The owner of the property that is on rent, is subjected to regular Cash Flow, generating him income. Moreover, a property is a long-term appreciation asset. That means, the value of the space will keep on increasing. It will also be beneficial at the time of tax payment. The disclosure of all the income and expenses occurred directly or indirectly, while purchasing and maintaining the property will grant tax leniency on the total income earned by the owner.
The owner must show all the income and expenses incurred on the property on his books of accounts in order to evaluate true. But the question arises here is ‘HOW’? What will be the accounting treatment of the rent incurred on the property? Well, here’s the answer: We can either go for cash or accrual method of accounting to treat the rent and expenses incurred on the property. If the finances of the real estate business are managed properly then it can give better profits for the business. So, quality commercial real estate accounting services is very essential to achieve a better stability to the business.
Charts of Accounts for Rental Business
In cash method, we will show the income and expense will there will be real cash involved while receiving or making payments. Whereas, in accrual method of accounting, we will treat the income and expenses when they are suppose to happen, and not when they actually happen I.e. mainly on their due dates. These methods are a better approach for the real estate business.
The following accounts involve or treats the rental accounts:
- Residential Revenue
- Cost of sales expense
- Salaries and wages expense
- Occupancy expense
- Communication and Technology Expense
- Insurance expense
- Professional services expense
- Sales revenue
- Interest revenue
- Rent/Desk fees expense
Things of Consideration
It is very important to consider few of the important points while doing the real estate accounting. Here is the list of few points:
-
Overdue Collection:
Overdue is the situation where the debtor is late for the payment. Here, the due date needs to be constantly reminded by the owner to ensure that the payment is received before the duration. If this is not maintained properly, then it affects the monthly cash flow of the firm. -
Tenant Revenue:
When the tenant pays the expense for the lease property, then it is considered as income by the landlord. The deduction of the income must be done before the upcoming due date payment. -
Revenue Allocation to Profit Centers:
The rent paid is considered as the revenue earned by the landlord which is also included in the additional income. A precise payment of this income will ensure better cash flow to the organization.
Accounts Junction has a nice experience of providing accounting services for real estate firms. They have all necessary accounting software that can handle all these accounting activities efficiently.
How is bookkeeping and accounting for real estate done in the US?
Bookkeeping and accounting for real estate rentals in the United States involve several key steps and considerations. Here's an overview of how these tasks are typically performed:
1. Chart of Accounts:
Establish a comprehensive chart of accounts specific to your real estate rental business. This chart categorizes income, expenses, assets, liabilities, and equity accounts relevant to your operations. Common accounts include rental income, property expenses (such as repairs, utilities, and maintenance), property assets (such as buildings and furniture), and mortgage liabilities.
2. Record Rental Income:
Track all rental income received from tenants. This includes documenting the amount, date, and source of each payment. It's important to differentiate between rental income, late fees, and other sources of revenue.
3. Track Expenses:
Keep a record of all expenses related to your real estate rentals. This includes property maintenance, repairs, property management fees, insurance premiums, property taxes, utilities, and any other costs incurred in managing the properties. Categorize each expense properly to facilitate accurate financial reporting.
4. Depreciation:
Determine and apply appropriate depreciation methods to account for the gradual wear and tear of your property and its assets. Consult with a tax professional to ensure compliance with tax regulations regarding depreciation.
5. Bank Reconciliation:
Reconcile your bank statements with your financial records regularly. This process ensures that all transactions are accurately recorded and any discrepancies are identified and resolved.
6. Financial Statements:
Prepare regular financial statements, including income statements, balance sheets, and cash flow statements. These statements provide a snapshot of your rental business's financial performance, assets, liabilities, and cash flow. They are essential for evaluating profitability and making informed business decisions.
7. Tax Compliance:
Maintain accurate records to ensure compliance with tax regulations. Track deductible expenses, depreciation, and other tax-related items specific to real estate rentals. This information is crucial for accurately preparing your tax returns and minimizing tax liabilities.
8. Software and Tools:
Utilize bookkeeping and accounting software or platforms to streamline the process and enhance accuracy. Numerous cloud-based accounting software options are available that cater specifically to real estate rentals, providing features like income tracking, expense management, and financial reporting.
9. Professional Assistance:
Consider engaging the services of a professional bookkeeper or accountant with experience in real estate rental accounting like Accounts Junction. We can offer expert guidance, ensure compliance with tax laws, and assist in optimizing your financial management processes.
Remember, it's essential to maintain proper documentation of all financial transactions and records, including invoices, receipts, and contracts. This documentation serves as evidence and support for your financial statements and can be invaluable during audits or when dealing with tenants, lenders, or tax authorities.
Consulting with a certified public accountant (CPA) or tax advisor specializing in real estate rentals can provide additional guidance tailored to your specific circumstances and ensure compliance with the latest regulations and best practices.
Benefits of bookkeeping and accounting for Real Estate Rental in the USA:
Accounts Junction, as a bookkeeping and accounting service provider, can offer valuable support to real estate rental businesses in the United States. Here's how our services can relate to the benefits mentioned earlier:
1. Financial Organization:
Accounts Junction can help real estate rental businesses maintain organized financial records by accurately recording rental income, expenses, and other transactions in their bookkeeping systems. This ensures that all financial information is properly categorized and easily accessible when needed.
2. Expense Management:
Accounts Junction can help manage property-related expenses by keeping track of maintenance costs, repairs, insurance premiums, property management fees, and utilities. This allows businesses to monitor their expenses effectively, identify areas where costs can be reduced, and make informed decisions about future expenditures.
3. Investor and Lender Relations:
Accounts Junction's services can support real estate rental businesses in building trust and credibility with investors and lenders. By maintaining accurate financial records and providing transparent reporting, we assist in establishing strong relationships with stakeholders, which can enhance the chances of securing financing or attracting potential partners.
4. Audit Preparedness:
Accounts Junction can help real estate rental businesses prepare for potential audits by ensuring that their financial records are accurate, complete, and well-organized. This streamlines the audit process and enables businesses to provide necessary documentation and evidence promptly.
5. Business Planning and Decision-Making:
By leveraging the financial data and insights provided by Accounts Junction, real estate rental businesses can make informed decisions about their investments, property performance, and future growth strategies. Accounts Junction's services contribute to the availability of reliable information required for effective business planning.
The bookkeeping and accounting services offered by Accounts Junction align with the benefits of maintaining proper financial records for real estate rental businesses. We provide support in financial organization, tax compliance, expense management, rental income tracking, financial analysis, investor and lender relations, audit preparedness, and informed decision-making, ultimately helping businesses optimize their operations and financial performance.
Types of softwares used for bookkeeping and accounting for Real Estate Rental in the US:
When it comes to bookkeeping and accounting for real estate rentals in the USA, there are several types or aspects to consider. Here are some key types of bookkeeping and accounting that apply to real estate rental businesses:
1. General Bookkeeping:
This encompasses the fundamental bookkeeping tasks such as recording transactions, maintaining ledgers, and reconciling bank statements. It involves tracking rental income, documenting expenses, and maintaining accurate records of financial activities related to your real estate rentals.
2. Cash Basis Accounting:
Cash basis accounting recognizes income and expenses when cash is received or paid. This method is commonly used by small real estate rental businesses with relatively simple financial transactions. Rental income is recorded when received, and expenses are recorded when paid.
3. Accrual Basis Accounting:
Accrual basis accounting records income and expenses when they are earned or incurred, regardless of when the cash is received or paid. This method provides a more accurate representation of the financial position and performance of real estate rental businesses. It involves recognizing rental income when it's earned and recording expenses when they are incurred, even if the cash transactions occur at a later date.
4. Cost Segregation Accounting:
Cost segregation accounting involves identifying and allocating costs associated with the acquisition, construction, or improvement of real estate properties into different asset categories. This allows for more accurate depreciation calculations and potential tax benefits by accelerating depreciation deductions for certain components of the property.
5. Depreciation and Amortization:
Real estate rental properties and certain assets within them are subject to depreciation and amortization. Depreciation refers to the gradual decrease in the value of the property over time due to wear and tear. Amortization typically applies to intangible assets such as leasehold improvements or loan origination costs. Proper accounting ensures accurate depreciation and amortization calculations and compliance with tax regulations.
6. Tax Accounting:
Real estate rental businesses must comply with specific tax regulations, including reporting rental income, deducting eligible expenses, and calculating depreciation. Tax accounting involves ensuring accurate and timely tax filings, adherence to relevant tax laws, and maximizing tax deductions and credits.
7. Financial Reporting:
Real estate rental businesses need to generate financial reports for internal and external purposes. This includes income statements, balance sheets, cash flow statements, and other financial analyses. These reports provide insights into the financial health, profitability, and performance of the rental properties.
8. Trust Accounting:
If you manage rental properties on behalf of others, such as property owners or trusts, trust accounting becomes essential. It involves maintaining separate financial records and accounting for the income, expenses, and distributions related to each specific trust or property owner.
Each type of bookkeeping and accounting mentioned above serves a specific purpose and contributes to the overall financial management of real estate rental businesses in the USA. Depending on the size and complexity of your rental operations, you may employ one or multiple types to ensure accurate and compliant financial records. Consulting with a professional accountant or tax advisor like Accounts Junction can provide further guidance on the specific types of bookkeeping and accounting that best suit your real estate rental business.
Accounts Junction provides comprehensive bookkeeping and accounting services that are well-aligned with the specific needs of real estate rental businesses in the USA. Our expertise in financial organization, tax compliance, and expense management enables businesses to maintain accurate records of rental income and expenses.
