Property Management Accounting: Accrual Vs Cash-Basis Method
Being a landlord is a business, and whether you’re managing one property or several, you need a method of keeping track of your transactions. It’s not just about collecting rent (if only it were that easy!) but you also need to decide how to track charges for repairs and services. All of this needs to be reported at the end of the year, not to mention it’s always good to know what your profit margin is!
There are two methods for accounting for your transactions: Accrual and Cash-Basis.
Accrual VS Cash Basis
The Accrual Basis
Using the Accrual Method, you would create transactions when money is earned or owed, not when the money is actually exchanged. An invoice, for example, is a notice of money due. You would note the invoice in your books then, and not when you’ve actually paid the invoice later.
The Cash Basis
When using the Cash-Basis Method, your books would reflect the exchanging of funds from your accounts exactly when it occurs, eg, you would note the invoice when it was paid, not when it was received.
Smaller businesses typically use the Cash-Basis Method, as it is simpler and reflects a more immediate status of where your cash flow is at the moment. The Accrual Method, however, can give insight into the long-term health of your business as it takes into account future income such as rent, and expenses and invoices that are due but have not yet been paid out.
Whichever method you decide is best for your business, keep in mind that you must be consistent! After all, these records are not just for you but are the framework for your reporting to the IRS. Also be aware that if you start with one accounting method and would like to change later on, you must seek approval from the IRS.
Reporting your taxes can be daunting – let Frontline Property Management do the heavy lifting! Our accounting department tracks your general ledger, sends you monthly reports and even files the taxes for your properties so that you don’t have to!
Learn more about our services to find out how Frontline takes the hassle out of property management!