What seasoned property managers know, and new ones learn quickly, is that the day-to-day reality of the job can be easily consumed by property management accounting.
While the nuances and pitfalls of accounting for property management might be best navigated by a team of experts, even if you’re not a technologically super-charged property accounting genius, the fundamentals of real estate accounting are within grasp!
In our mission to empower property managers with the support, tools, and information they need to succeed, we’ve curated this list of common and not-so-common real estate accounting terms that both rookie and veteran property managers encounter.
Our goal is to add value and provide some levity to property managers—the hardest working folks in real estate! To help you learn we’ve provided Proper examples, and to help you laugh, we’ve provided a few ImProper examples:
The span of time reported in a financial statement.
An accounting period may be annual, quarterly, monthly or customized to suit a client’s needs.
Proper employees unanimously concluded there is no calling nobler than property management accounting Period.
A method where transactions are recorded as soon as revenue is earned or an expense is incurred, ensuring recognition in the same accounting period , i.e., payments recorded before money exchange; the alternative to cash accounting.
By recording transactions as soon as they are incurred, accrual accounting provides a more current understanding of a property’s financial position around pending revenue or expenses.
Mrs. Pinkerton promised she would send payment for the damages her pet iguana made to her microwave, so the property accountant notated the forthcoming payment while performing accrual accounting.
Assigning funds to various accounts or periods, or expenses to different properties or units (as in RUBS and CAMs).
Proper’s expert accountants advised regular allocation of maintenance for a certain property’s chocolate fountain, which clogs regularly.
Anything the property owns or controls that provides future economic value, generally listed from most to least liquid.
Proper’s property management accountants advise Sarah to list the rare Star Wars collectibles decorating her building’s lobby among the property’s assets.
Unlike standard accountants, expert real estate accountants keep an eye on your best assets.
A balance sheet is a snapshot in time representing the Assets (A), Liabilities (L), and Equity (E) of a property.
Looking at the balance sheet, Proper accountant Helga reviewed the property’s debt to equity ratio.
Helga took up tightrope walking only to find that her acumen with balance sheets does not translate to…balance.
The (often tedious and time-consuming) process of reconciling your property’s bank GL to the bank statement identifying reconciling items and when appropriate correcting unauthorized transactions.
While doing bank reconciliations, Brian found a check written for $100 for Girl Scout cookies cleared for $1000. He vowed to find either the error or the cookies.
Brian would rather get stuck talking to Mrs. Johnson in 34B about her pet rock collection than spend one more hour doing bank reconciliations.
A method in which revenue and expenses from transactions are recorded only when money is exchanged; the alternative to accrual accounting.
Facundo’s property does cash accounting, so he made a journal entry for hot tub repair when the invoice was paid, instead of when it was received.
Facundo suspects people who don’t use cash accounting have accrual intentions.
Statement of operating, investing, and financing activities, so you know information on how the changes in the balance sheet and income affect your cash position.
Improving cash flow may come down to getting paid faster with prompt invoicing and digital transactions.
Certified Public Accountant
A professional designation of a qualified accountant who has to meet state licensure requirements such as education prerequisites, ethics and passing the Uniform CPA exam.
CPAs are useful for stuff like dealing with changing legislation, filing taxes, and completing complex transactions.
CPA mantra: be audit you can be.
A chargeback occurs when you spend money on a property and the cost is the responsibility of a tenant, i.e., you need to be reimbursed. It may also be referred to as expense recovery.
Chris had to send a chargeback to Mr. Esqueda for the cost of emergency plumbing, and bulky trash pickup for his waterbed and aquarium.
Though Mrs. Kringle in 34B claimed that damage to her floor was from the wood being ‘too soft,’ rather than her indoor bowling practice, Chris executed a chargeback for the repairs.
An increase in an asset, and expenses or a decrease in liability, equity and revenue.
Diego processed a debit for the repairs to Mr. Klegman’s doorbell.
Property managers get the credit while Proper’s accountants process the debit.
The decrease in value in an asset over time due to use, wear and tear or obsolescence.
Even with customized decals, rims, and spoilers, the value of the golf carts on Helen’s property depreciated significantly with age.
Helen was doubly surprised at the rate of depreciation on her Nickelback memorabilia.
The value of a property after liabilities (assets – liabilities = equity) . This is the portion of the property owned directly by investors and owners.
Many owners reinvest equity built in their property once they’ve paid off mortgage debt.
Brenda was surprised by her property’s growth in equity once she installed a mechanical bull.
The overall cost of doing business, including fixed, variable, accrued, and operational expenses.
With Proper, owners save on the expense of in-house accounting.
We sent our Proper, people tacos because tacos make people happy, and making people happy is a worthwhile business expense.
The section of a property’s cash flow statement showing the net flow of cash used to fund the property. Financing activities include transactions involving debt, equity, and dividends.
Keeping track of financing activities allows Justin to see how funds were raised for his properties.
The principal payments on his property’s bouncy house factored into the financing activities on Justin’s cash flow statement.
A type of expense that does not change, e.g., rent, mortgage payments, potential utilities, tax payments, and insurance. Total cost is constant, and per-unit cost decreases with volume increases. The opposite of a variable cost.
Viviana was pleased to see how much adding a “Watch Your Step” sign decreased the fixed cost of insurance premiums.
Though she was the only one who read tabloids, Viviana counted the property’s subscription as a fixed cost.
The complete record of a company’s financial transactions used to prepare all financial statements.
The general ledger was reviewed for completeness and accuracy before preparing the financial statements.
During a general ledger review, Susan realized a company called Pest Control was categorized as maintenance but really, Pest Control is the name of the owner’s nephew’s band hired to play the community holiday party.
Generally Accepted Accounting Principles/GAAP
The rules and standards all accountants abide by, set by the Financial Accounting Standards Board.
Any competent CPA should be well-acquainted with GAAP.
We hired a bookkeeper who was inexperienced with generally accepted accounting principles—there was a clear GAAP in his knowledge.
Total of all income generated before expenses and taxes.
Regular recurring monthly payments make the biggest contribution to gross income.
When our accountants ask about gross income, they’re not trying to insult your earnings.
How much cash flow has been generated or spent from investment-related activities. Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets.
The generous cash flow at Miranda’s property allows for bold investing activities.
Miranda still counts the buying and selling of Beanie Babies among her investing activities.
Transactions or updates recorded in the general ledger and should include a date, amount, and description.
Jack thought he caught a redundant journal entryfor ‘Cotton Candy Machine Repair,’ but it turns out the cotton candy maker is simply unreliable.
Jack quickly put his personal diary away when he realized those weren’t the correct journal entries to review.
All debts the property has yet to pay.
Chris’ pending payment to the caterer is a current liability and any legal concerns from the poorly conceived raw bar are contingent liabilities.
Proper’s top-notch real estate accountants can only tell the truth—they have no liability.
The amount earned in profit calculated by subtracting expenses from revenue.
With the savings Proper found to boost Justin’s net income, he invested in sauerkraut and stinky cheese…he wanted to make a gross profit.
Money earned by professional fishers and/or basketball players is all net income.
The costs associated with the maintenance and administration of your property on a day-to-day basis.
When the residents started a kazoo club in the courtyard, Rob accounted for earplugs and white-noise generators in his operating cost.
Considering the number of bank reconciliations he had to perform, Rob was glad he accounted for stress balls and ibuprofen in his property’s operating cost.
The money your property brings in from ongoing, regular business activity, e.g., rent payments, amenity dues, parking fees, storage charges, and sales.
Considering how much his property’s vending machines added to operating revenue, Greg underestimated how much tenants love grape soda.
Greg was surprised how little pool use contributed to operating revenue, so he considered filling the pool with grape soda.
Profit and Loss Statement/Income Statement
The P&L is a summary of revenues and expenses. Revenues are subtracted from Expenses, leaving the Net Income.
Looking at her income statement, Lizbeth was happy to see how much Proper lowered her spending on accounting services and improved her margins.
After reviewing the most recent income statement, Lizbeth reconsidered how much of her property’s operating expenses could be allocated to Taco Tuesday.
Provider of expert end-to-end property accounting services for real estate, eliminating the need for in-house accounting, and improving your bottom line.
Proper’s people-first approach to real estate accounting makes life easier for property managers; consider us an accounting firm where everyone counts.
Proper saves property managers up to 30% on their accounting costs and about twenty-five hours of accounting chores every month.
Ratio Utility Billing System aka RUBS
A cost-effective alternative to sub-meters that divides the cost of common area utilities among tenants.
Martha considered the square footage and occupants per unit in her RUBS calculation to split the tenant’s water bill.
TLC considered Ratio Utility Billing for the individual units on their rental property before deciding they don’t want no RUBS.
Real Estate Accountant
A godsend to property managers and owners alike, effective real estate accountants (like the specialists at Proper) ensure the financial health of a property, making sure payments are made on time and enterer properly, and that you understand legal obligations, financial performance, and budget for the specific needs of real estate management.
Mariana spends more time on ballroom dancing and less time on real estate accounting since hiring a Proper real estate accountant to look after the books.
Everyone at Proper HQ gets along well because our real estate accountants are experts at reconciliation and none of them are too taxing.
Real Estate Accounting
A specialized property accounting niche focused on tracking and recording the financial health of real estate following the Assets = Liability + Equity (A=L+E) formula.
Proprietary AI supercharges Proper’s real estate accounting specialists who pass on the time and money savings to customers.
With his experience at a Big Four accounting firm and years working for a large property management company, Hector is a whiz at real estate accounting, but fidget spinners still elude him.
Return on Investing
The efficiency of an investment; the amount of return on an investment relative to its cost.
With an average return of 100%, landscaping is among the property improvement projects with the best ROI.
The ROI on her home brewing kit became evident when Inez’s Ideal IPA made its IPO.
Having enough funds or liquid assets to cover the property’s debts.
Low-interest rates helped Sofia keep her businesses solvent.
Once her property was solvent, Sofia invested in a lemonade stand. She wanted liquid assets and acidic solvency.
Costs that change with the volume of sales, e.g., move-in/outs, unit turns, surprise repairs, or maintenance; the opposite of fixed costs.
While considering the variable cost of payroll, Calvin wondered if his property had a need for two in-house DJs.
Property Managers don’t worry about the variable cost of chimney maintenance—it’s on the house.
A tax form to report self-employment earnings, interest, and dividends, etc. The party making payments is responsible for filing this form. In the real estate industry (and in particular, property management), specific scenarios determine when and how these forms are used.
Jay needed Proper’s help to sort through the 1099 forms his property issued to various vendors and contractors.
Since outsourcing his real estate accounting to Proper, Jay’s got 1099 problems, but tax readiness ain’t one.
This isn’t an exhaustive list, but rather an introduction to property management accounting basics—the fundamentals. Think of it as a primer! If you’re interested in learning more and seeing how Proper’s services can make life easier for you and your tenants, let’s set up a time to talk.