Every transaction in the real estate business is a big deal. That is why real estate brokers need to understand the fundamentals of accounting.
Here are three accounting tips you should know as you open or continue to run your brokerage.
- Accounting System
- Accurate Financial Records
- Accounting Method
Accounting System
Setting up your real estate accounting system the right way in the beginning will enable you to minimize the labor and stress involved in large-value transactions, extreme income fluctuations, employee pay formulas, and government regulations. The Balance Small Business published a sample real estate agents chart of accounts that you might also find helpful. Software Advice also shared a comparison of the best accounting software for real estate agents.
Accurate Financial Records
At some point, you will have to show interested parties like lenders, shareholders, creditors, and government bodies (i.e., the IRS) your financial records. Five of the most important financial documents business owners need include:
- Profit and Loss Statement (otherwise known as an income statement) is used to evaluation your company’s current financial condition and prospects for growth.
- Cash Flow Statement is used to forecast revenue in and expenses out over a period of time, often about three years.
- Balance Sheet is used to show how your business is doing at a particular point in time, e.g., quarter by quarter or year to year.
- Tax Returns are used to help you and your financial team to create growth strategies for your brokerage.
- Accounts Receivable/Payable (otherwise known as aging reports) categorize debts owed to the business.
Accounting Method
There are two accounting methods to choose from – cash basis and accrual. Once you make a choice, you must stick with it, unless you submit a change request to the IRS.
Cash basis accounting is often preferred by small businesses because it’s easier to maintain, and it tells you how much money you actually have in the bank on any given day. Accrual accounting is usually the choice of larger companies because it portrays a more accurate portrait of your real estate business’s financial performance. Accrual accounting also allows you to prepare for your long-term plan, which is helpful if you are thinking about expanding your business.
Bonus Accounting Tips
In addition to these three, big accounting tips, here are some additional tips you might find helpful, including:
- Creating an accurate chart of accounts
- Keeping business and personal transactions separate
- Developing a fool-proof accounts receivable process
- Reconciling your bank statement each month
- Leveraging payroll software
Working with an accountant with years of industry experience is invaluable. We can help you navigate the highs and lows of the industry, while adhering to the many governmental regulations unique to it. If all this seems overwhelming, consider outsourcing your accounting to us. Give us a call.
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