When you first get into property management, you will need to decide between two main accounting methods: cash and accrual. Even if you don’t have an accounting background, you will need to understand these basic principles.
There are a number of differences, but the main one is that with cash accounting, the arrangement used by most property managers, recording of transactions is done as soon as money changes hands, whether that’s money that’s coming in or going out.
For example, rent received in May will be recorded as income for May, even if it is being applied to the June rent. The same will apply to any bills you have to pay for building upkeep or utilities. Expenses are recorded when they are paid, not when the bill is received.
With accrual accounting, expenses and income are recorded as they occur, not when they are actually paid. This method is about tracking transactions rather than cash flow. Rent due on a particular date, for example, is recorded when it is due, irrespective of whether your tenants are being a little late paying or not.
Accrual Accounting Benefits
Cash Accounting Benefits
Ultimately, you must be consistent with whichever method you choose. It will make a significant difference to your resulting financial statements.
Which system is right for you? It’s entirely up to you and will depend on your individual organizational needs. Whichever system you choose, you must tell the IRS and get them to approve the change if you later decide to alter systems.
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