Although not all property managers have an accounting background, it’s nonetheless important that any landlord handling the books has a firm grasp on basic accounting principles. Perhaps most importantly, it’s essential to have a working knowledge of the differences between cash and accrual accounting. Quite simply, the difference between cash and accrual accounting comes down to when you enter information in your books.
Cash Method Accounting
With the cash method, information is entered into the books as soon as money changes hands. In other words, as soon as you receive a rent check, it’s entered into the books as income. And as soon as you pay the plumber for the kitchen sink he unclogged, you enter that into the books as an expense.
Accrual Method Accounting
Accrual method accounting requires that payments and income be recorded as soon as money is due or owed. In this case, even if a tenant is a bit late on rent for July 1, you would still log that rent income into the books despite the fact that you have not yet received a check. Likewise, even if you have not yet cut your property management company’s checks for the week, you will enter the money you owe to the plumber for work completed as an expense immediately upon receipt of the bill.
Whether you use cash or accrual accounting is completely up to you, dependent upon which system seems most intuitive and appropriate for your company. While most property managers use the cash method, this is purely based on the system’s simplicity—as soon as a check is received, it’s immediately entered, making for a clear-cut system. The benefit to accrual accounting, however, is that it may provide a more accurate snapshot of your company’s accounts. For example, even though you haven’t paid a vendor yet, with accrual accounting you still know that $1,500 is earmarked for this expense and, therefore, should not be spent elsewhere.
Remember, when it comes to accounting, consistency is key. Whether your company ultimately opts to utilize cash or accrual accounting, be sure that your records consistently use the same system. It’s also important to know that, although you may choose either cash or accrual accounting at your own discretion, you must alert the IRS and obtain their approval if you opt to switch to the other system at a later date. For more property management accounting basics, be sure to check out Buildium’s book Property Management Accounting: A Survival Guide for Non-Accountants.
