Real estate transactions seem complex and confusing, but you can easily account for them in your bookkeeping with a little knowledge. This guide will walk you through the basics of accounting for real estate transactions to be confident in your books. With this information, you'll be able to handle any real estate dealings with ease!
Whether you are a real estate agent, property owner, or person simply trying to keep track of your finances, it is important to understand the basics of accounting for real estate transactions.
This guide will provide an easy-to-follow explanation of accounting for different types of real estate deals. Keep in mind that this information is not intended to be comprehensive – please consult a financial advisor or accountant for more detailed advice.
When it comes to accounting for real estate transactions, you need to take a few key steps to ensure that everything is correctly accounted for. In this easy guide, we will walk you through the process of accounting for real estate transactions so that you can confidently complete this task every time. By following these simple steps, you'll be able to account for all of your real estate deals correctly!
When you're buying or selling a house, it's important to ensure the deal is accounted for correctly. Otherwise, you could run into tax problems down the road. This easy guide will take you through the basics of accounting for real estate transactions. By following these simple steps, you can ensure that your deal goes as smoothly as possible!
With that said, let's get started!
Who requires a system for real estate accounting?
Let us begin at the very beginning, shall we?
A real estate accounting system is useful for a variety of reasons, including the following:
- Brokers and real estate agencies that deal in sales or rentals of residential or commercial property
- Management businesses for residential or commercial properties
- Companies that engage in construction or property development
- Trusts for investments that have real estate holdings as part of their investment portfolio
What is the function of a real estate accounting system?
Your business's financial dealings and real estate activities can be meticulously recorded by an accounting system. You will be able to manage your company more effectively and figure out things like the following with the help of the information recorded by the system:
- How well your company is performing overall and whether or not it is expanding
- The total amount of money that you have earned.
- How much tax and many other fees should be paid by you.
- Whether or if you have sufficient funds to pay your employees and your bills.
- Which aspects of the firm are succeeding, and which ones have room for development
How exactly do you go about constructing a reliable accounting system for your company from the ground up?
A good place to begin is with the chart of accounts designed for real estate brokers.
Establish Your Company's Chart of Accounts
A Chart of Accounts is, in its most basic form, a list of the accounts in the general ledger into which financial transactions are entered. You might think of it as an organisational tool that is designed to assist you in segmenting transactions into the following categories:
- Revenues
- Costs
- Assets
- Liabilities
It should reflect how your company produces money as well as how it spends it.
Even though they are all real estate firms, the Chart of Accounts for a real estate broker or letting agent might look quite different from the Chart of Accounts for a real estate investment company or management company.
For example, a real estate management company would require accounts to record rents received from tenants and rents paid out to tenants. On the other hand, these might not be important for a real estate developer whose primary focus is on purchasing and selling properties.
It is recommended that you number or sequence your accounts so that it will be simpler for you to add additional accounts at a later time. This could be useful, for instance, if the nature of your firm involves the acquisition of properties and you wish to maintain distinct records for each one.
By having a standardised template in their programme, the majority of real estate accounting software products make it simple for real estate brokers to establish a Chart of Accounts. However, you will still need to modify it to fit the needs of your company.
Utilise software designed specifically for real estate accounting
There are a number of ways in which accounting software designed specifically for real estate enterprises can ease the handling of financial and monetary matters. For instance, even the most basic software will allow you to download bank feeds, which will free you from the need to enter data by hand.
Electronic records of transactions are kept and can be retrieved at the touch of a button for the purposes of additional analysis and reporting. Because it is simple to assess the current state of the company's finances, it is possible to address any prospective issues before they become serious. You may, for instance, be able to bring under control escalating costs, problems with cash flow, and narrowing margins of profit.
The most up-to-date real estate accounting software also includes components for the goods and services tax (GST), payroll tax, and income or company tax. You may eliminate a lot of the hassle associated with tax compliance by using these options.
Which software is the most reliable and user-friendly for real estate corporations, real estate agents and brokers, and other property businesses?
Using accounting software that is hosted in the cloud enables you and your employees to perform their jobs from virtually any location, provided that they have access to a mobile device, laptop, and internet connection.
We like Xero because it is compatible with a wide variety of third-party applications, which enables you to connect the accounting and operational activities of your business. There are a variety of supplementary features available on Xero that make it feasible to run your business directly from the software. These options range from rental revenue and cost trackers to cashflow monitoring tools for property development projects.
Recognise important accounting issues
In addition to having access to the appropriate technologies, you should be familiar with the various complexity that are involved in accounting for real estate transactions. The following is an outline of some of the difficulties:
1. Recognising revenue
IFRS 15 outlines the processes that must be followed in order to recognise revenue from customer contracts. To stay on top of the competition, real estate developers need to adhere to this accounting standard, which is one of the most important ones. However, it requires a high level of technical expertise and is extremely challenging to implement without the assistance of an accountant.
2. Property assessments
It is not an easy task to determine how much an older building is worth, especially in situations where there haven't been any recent transactions involving buildings that are comparable. Keep in mind that taxes and other charges are frequently determined on the value of the property, which means that an improper valuation could get you into legal trouble.
3. Tax treatment of property sales
The profits that you make through the sale of property development projects could be subject to a variety of various types of taxes, depending on the nature of your company. This may take the form of the sale of trading stock, a profit, an initiative designed to generate profits, or a capital gain.
4. Sales incentives
When it comes to accounting for real estate agents, the payroll process can be a difficult one because staff members at real estate agencies are frequently given a regular salary in addition to sales commissions. This indicates that the amount of money received in paychecks could look very different from one month to the next.
Payroll calculations can be excruciatingly slow if you aren't utilising accounting software that works out commissions immediately once transactions are closed.
5. Legitimate trust accounts
In the context of real estate dealings, the money that real estate agents collect and keep on hand for the benefit of third parties is deposited into trust accounts.
The documentation and administration of trust funds are subject to a number of stringent legal requirements. Additionally, you are obligated to have annual audits performed on any trust accounts that you maintain.
To guarantee that statutory obligations are satisfied, accurate bookkeeping and a working knowledge of the applicable legislation are both necessities.
Your Company's Marketing Efforts
For business owners, the quality of your marketing could mean the difference between success and failure.
The majority of real estate brokers build their businesses on the strength of their reputations and the referrals they receive. Even if these components are still essential, you need to move the focus of your marketing efforts to the internet sphere. Local searches like as "Real Estate Agent East Sydney" are sending more and more traffic to your website. This is important because your website is frequently the first point of contact with a possible new client.
In the world of business, you only have one opportunity to make a good first impression, and your website serves as both your "online shopfront" and a "silent sales person," working around the clock to promote your company.
When compared to those of other accounting companies, the marketing competence is one of the most significant points of differentiation. Some can help you with your branding (including your company name, logo, and motto), as well as your corporate brochure, while others can show you how to harness the power of social media to get more referrals.
Over the course of the past few years, they have assisted scores of customers in the creation of websites for lead generation that are inexpensive, of high quality, and responsive to mobile devices such as smartphones and tablets. Some people are able to offer advise and guidance with the content of your website, including the production of videos. In addition, if your website does not have any calls to action or lead magnets, we will assist you in constructing them.
In addition, they will educate you on traffic-driving methods such as remarketing and search engine optimisation (SEO), with the end goal of increasing the number of visitors to your website.
If you aren't making use of some of these different marketing strategies, it's likely that your company won't be able to attain its full earning potential.
Your company's identity is the first step in the marketing process, and we have guided scores of clients through this phase of their businesses over the years. Using various tools available online, we will assist you in developing a contemporary brand that strikes a chord with your ideal customers. We are even able to assist you with the creation of your stationery at a cost that is significantly lower than that of hiring a graphic artist or marketing expert.
We will assist you in gaining an understanding of the Four Ways to Grow a Business as well as locating the primary contributors to the profits generated by your company. We are able to guide you through a number of different tactics for increasing profits, and we can even calculate the potential for increased profits in your company.
The purpose of this function is to ensure that you do not leave any potential profit on the table. If you are a real estate agent, we can provide you with a variety of accounting, taxation, and business coaching services, including the following:
- Start-Up Business Advice for Real Estate Agents
- Advice regarding the Purchase or Sale of an Agency
- Tools including a Start-Up Expense Checklist, Business Plan Template and Cash Flow Budget Template
- Provide Advice and Assistance with the Establishment of Your Business Structure (sole trader, company, trust, partnership etc.), taking into account issues like Asset Protection and future discount Capital Gains Tax Concessions
- Registrations for Business Name, ABN, TFN, GST, WorkCover etc.
- Preparation of Business Plans, Cash Flow Forecasts and Profit Projections
- Accounting Software Selection and Training
- Preparation and Analysis of Financial Statements
- Bookkeeping and Payroll Services
- Income Tax Returns and Tax Planning Strategies
- Audit of your Trust Account
- Marketing Advice and Assistance
- Wealth Creation Strategies and Financial Planning Services
- Industry Benchmarking and KPI Management
- Business Succession Planning
- Vehicle & Equipment Finance (Chattel Mortgage & Lease)
- Advice & Assistance with Claiming Motor Vehicle Costs
- Recession Survival Strategies
- Advice regarding Employee Relations and Workplace Laws
- Business & Risk Insurances
Bookkeeping Errors In Commercial Real Estate That Must Be Avoided At All Costs
1. The Importance of Keeping Accurate Books in the Commercial Real Estate Industry
In the real estate industry, effective bookkeeping procedures are crucial for a number of different reasons. The following are some of the advantages:
- Helps to save both time and money
- Enables more effective performance of activities related to record-keeping
- Reduces the anxiety caused by filing tax returns, making tax payments, and being audited
- Enables you to handle your commercial real estate properties more efficiently
- Streamlines the entire procedure, which guarantees that the CAM reconciliation will be accurate, quick, and efficient.
2. Bookkeeping Mistake #1: Cross-Referenced Category of Expenses
The first error that can be made when maintaining books is to create categories for expenses that overlap. It is absolutely necessary to keep an expense record that is both clean and well organised if one wishes for their bookkeeping to go more quickly and effectively.
The majority of the fees that are incurred by a real estate business are rather basic and uncomplicated. The problem is that owners of businesses frequently make duplicate categories or neglect to report expenses under the appropriate category.
It is likely that you will group the incorrect items if you do not properly categorise your spending. As a consequence of this, you will either incorrectly categorise expenses or overcategorize them. In this context, it is essential to note that individual expenditures could be subject to a different tax rate. You can save a significant amount of money by correctly classifying your items. In addition to this, categorising your assets and liabilities will paint a clear picture of your current financial situation.
Use the basic categorisation criteria for bookkeeping to ensure that you describe your expenses in the appropriate manner. It can be difficult to create a chart of accounts from scratch, but certain resources provide in-depth explanations of the most effective accounting procedures.
3. Bookkeeping Mistake #2: Failure to Maintain a Safe Backup of Records
Cloud backups are becoming increasingly popular among business owners in the real estate industry, just as they are among owners of most other types of companies. As of the year 2019, 94% of organisations of this size had made the transition to cloud backup. Becoming a paperless office comes with a number of advantages, including the following:
- Time savings
- Cost-cutting
- Simple access and navigation
- Less space consumption
- Better communication
- Enhanced Service to the Customers
On the other hand, this does not necessarily imply that the use of paper backups has become completely obsolete. While preserving records digitally may have its advantages, eliminating paper completely does come with a number of drawbacks: 1) Technical problems can make a paperless office a liability during audits, and 2) your data are vulnerable to security concerns and viruses if they are stored digitally.
Having said that, digitising receipts is without a doubt going to make day-to-day operations more streamlined and easier to understand. You must, however, choose a company that provides a safe and secure server for the storing of records if you want to avoid any potential security problems or the loss of data.
4. Bookkeeping Mistake #3: Being Overly Ambitious
Another typical error in bookkeeping that almost all real estate managers make is keeping their books in order despite having just a fundamental comprehension of financial matters. One poll found that sixty percent of business owners are in agreement that they do not have the financial literacy to keep their own records.
Even though maintaining accurate books is critical to the success of any real estate enterprise, the fact is that not everyone is comfortable working with numbers. And not everyone is aware of the proper way to record each different kind of transaction.
Because of this, you should seriously consider working with an experienced book-keeper to organise the financial aspects of your company. An experienced book-keeper possesses the necessary skill set to conduct accounting operations in a timely and effective manner, which is essential.
Even if you want to use bookkeeping services, it is a good idea to get some training in bookkeeping first. You won't be able to evaluate the performance of bookkeepers or the accounting tools that they use if you aren't familiar with the foundations of real estate bookkeeping.
After you have made the decision to outsource your bookkeeping, you should supervise, but not micromanage, the process. A manager with no background in accounting is likely to miss small errors that can only be spotted by an expert eye. In addition, because they are specialists, they are aware of any changes in regulations that may have an impact on the economic well-being of your company.
Consult a CPA
It is essential to have assistance from a qualified professional whenever you are creating your chart of accounts or configuring your accounting software.
An accountant who specialises in real estate enterprises is qualified to evaluate your organization's systems and processes to determine whether or not you are adhering to the required accounting and tax standards for dealing with real estate transactions.
Accounting professionals have the commercial acumen as well as the data analytic abilities necessary to deliver high-impact business advice. Although tax return preparation, BAS lodgements, and tax planning remain the bread and butter of the accounting industry,
If you are just getting started, you might want to receive some advice on how to organise a new firm in a way that is tax-efficient while also minimising the risks to your assets. You might even purchase into an existing agency. You could also obtain assistance with preparing and presenting your loan applications in order to increase your chances of having them approved.
An accountant will be able to look through your financial records with you once your company is up and running so that you can evaluate how well you are doing in comparison to other businesses.
Final Reflections
The state of your company's finances is directly proportional to the overall health of your company. You always have the option to outsource bookkeeping in order to manage complicated chores.
You may maintain an accurate record of cash influx and cash outflow by properly tracking and monitoring your financial transactions. After you have gained a greater grasp of the financial aspects of your real estate investments, you will be able to make more profitable decisions for your company and, ultimately, save money.