One of the most important accounting practices in any business is establishing and maintaining a property management chart of accounts. As a property manager, your chart of accounts helps you keep an eye on all the transactions for each of your properties in your portfolio.
In this article, we’ll walk through setting up a chart of accounts for your properties and discuss some best practices with the help of Taylor Brugna, Partner, The real estate CPA.
“Having a clear, concise chart of accounts is crucial for your clients to understand how their rental properties are performing,” Brugna says. “It can guide future investments and help both you and your clients make important financial decisions.”
What is a Property Management Chart of Accounts?
Brugna describes a chart of accounts as a record that organizes each transaction for your properties into accounting categories. These categories provide a clear understanding of the data relevant to each property. Transactions fall under one of: five overarching categories: assets, liabilities, expenses, income or equity. Each property gets its own coding system within your chart of accounts. Together, all those accounts form your chart of accounts.
The codes can get quite detailed. But that’s a good thing. By giving each transaction a specific code for each property, it’s easy to keep track of where every penny goes and which of your properties are making or losing money.
Assets include checking accounts, savings accounts, and accumulated depreciation on any property, while your liabilities may include refundable security deposits, credit card balances, and taxes/insurance due.
Stock listings typically include net income, retained earnings, and any contributions or distributions for your properties.
Why do you need a chart of accounts?
In the days before computers, each transaction had its own page in a ledger, recording income, expenses, assets, liabilities, and equity. Every transaction was recorded and the numbers were added up at the bottom of the page. To get an overall picture of gains and losses, an accountant only needed to add up income, assets, and equity and then subtract expenses and liabilities.
A chart of accounts is the backbone of all the financial reports and forecasts you make for both your business and your properties. With this you can:
- Report the financial health of rental properties to owners
- Determine rent and rate increases
- Forecasting marketing, human resources and other budgets
- Report accurate financial data for taxes
Set up a chart of accounts for your property management portfolio
A chart of accounts is set up in a hierarchy of items. You could even see it in terms of a parent-child organization. The top-level entries are the five we discussed above. Then each of your trades will be grouped below as ‘children’.
A lot of experts recommend line item numbering with a range of 1,000. For example, assets would be given the highest number 1000 and all assets would be coded between 1000 and 1999. According to Brugna, a typical numbering system would be organized as follows:
- Assets: 1000-1999
- Obligations: 2000-2999
- Equity: 3000-3999
- Yield: 4000-4999
- Cost: 5000-5999
Below that, you can assign different types of earnings their own numbers. For example, 1100 could be rent, while 1200 could be HVAC maintenance costs.
Finally, you need a way to identify what income comes from which property, while leaving room to add future properties.
To do that, assign a number to each property in the 1st place of your accounts. So your property at 123 Elm St. would be assigned 1101 for rent and 1201 for HVAC expenses. For other accounts, it would still get a one in first place.
To keep line items organized, make sure each line has a clear and short summary.
Real Estate Management Chart of Accounts Examples
Let’s see what the above example would look like in a spreadsheet.
At the top level, your chart of accounts will look something like this:
Below those high-level categories, you then fill out each line item description:
Finally, transactions for each property would be recorded using codes based on the descriptions you have already set.
If you’re using a simple spreadsheet, it can take some time to set up a chart of accounts. You need to track down every transaction that goes through your property management company, create a coding system that works best for your business, and then prepare the sheets. However, taking the time to create a consistent accounting method that makes adding new transactions easy is worth it.
If the idea of updating a spreadsheet is unappealing, there are of course software solutions that automate accounting processes and keep your books much more secure than a spreadsheet ever would.
Quickbooks probably comes to mind for your own company’s finances. This flexible software includes templates that work for most businesses and integrates with other tools. If you are using a property management software solution with an open API, you can integrate Quickbooks directly into that tool.
However, it’s important to keep in mind that Quickbooks auto-populates their charts of accounts and is best suited for your internal business finances versus accounting for the properties you manage. You may need to spend some time customizing it to meet the needs of a property management company.
However, when it comes to handling the accounting of your owners’ properties, a solid property management solution will have built-in accounting tools, with templates already configured for those needs. Buildium comes with a standard chart of accounts along with the option to: edit an existing ledger account.
Chart of Accounts Best Practices
Once you have your chart of accounts up and running, organize a stakeholder training session where you explain the coding system. Also teach them to adhere to the following best practices.
#1: Assign one person to update the chart of accounts
A chart of accounts is definitely a cook-in-the-kitchen situation. Too many people accessing the file will just cause errors and chaos – and by too many we mean more than one.
#2: Update regularly and consistently
Make sure your team regularly reports transactions to you or the person in charge of the chart of accounts. Give them a deadline to get all their transactions in. That way, there’s time to update and tune in at the end of the month.
#3: Stick to Your Coding System
Sure, you’ll need to add new line items for new transactions, but each new item needs to be sorted into existing categories that follow the coding system you set.
“Consistency in categorization will help your property owners identify trends, areas of success, and areas for improvement,” Brugna says. “For example, if you monitor repair and maintenance costs month after month, you get a clear overview of costs and see how renovation budgets are being tracked.”
#4: Record absolutely everything
Don’t keep anything off the books, or even in a separate chart of accounts. Register every transaction in the same place. Taxes, compliance, real estate forecasting and investment decisions all depend on a complete picture of the finances of your properties.
#5: Keep the miscellaneous items to a minimum
If you’ve ever moved, you know that you always have that one box of all kinds of stuff that you don’t know what to do with. When you unzip it, you’re left with a jumble of random things to deal with.
The same goes for your chart of accounts. While you may have various income or expenses, don’t use that category as a collective term for transactions that you simply don’t want to deal with at this time. You’ll end up with a mess that’s hard to reconcile at the end of the month, quarter, or year.
A chart of accounts is an indispensable tool for any successful property management company. Whether you keep a spreadsheet, use a one-size-fits-all program like Quickbooks, or opt for specialized accounting tools from a property management software solution, choose the method and system that works best for you and stick to it.
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