As the owner of a new real estate business, you’re probably aware of the unique characteristics of this industry. Set up your accounting system the right way, and you’ll minimize the labor and stress involved in large-value transactions, extreme income fluctuations, employee pay formulas and government regulations.
These tips are for you if your business is:
• Real estate broker or agent
• Property management
• Building construction
• Residential sales
• Real estate investment management
Learn the Regulations
Not only real estate transactions, but also the financial management of a real estate business, are overseen by local and state commissions. Familiarize yourself with their requirements before making any decisions about your bookkeeping system. If the language is unclear, consult a professional accountant who specializes in real estate.
Select Your Accounting Method
You have two choices: cash basis or accrual. Once you make a choice, you must stick with it, unless you submit a change request to the IRS. (Your first tax return shows the IRS which one you chose in the beginning — you don’t have to submit any forms for that.)
Cash basis accounting often preferred by small businesses because it’s easier 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 for its clearer view of financial performance and long-term planning.
Create a Chart of Accounts
This complete index of your company’s transactions is essential for knowing how you stand. It will save you many hours of work when you need to measure performance, generate a report, locate past transactions or prepare tax returns.
The chart of accounts is organized into categories for easy sorting and retrieval. These categories can be anything you need. Under Assets, they might include Cash, Accounts Receivable and Vehicles. Under Liabilities, you might have sub-accounts such as Accounts Payable, Loans and Payroll.
Keep Business and Personal Transactions Separate
Don’t fall into the bad habit of pulling out your business credit card or checkbook to pay personal expenses — or vice versa. Without fail, it will cause more problems than it solves, including inaccurate books, tax mistakes and cash flow crises.
Opening a separate bank account and credit card that’s strictly for your business will also make you look more professional and creditable to your customers, creditors and investors.
Fool-Proof Accounts Receivable
Collecting what they’re owed is one of the biggest headaches for small businesses. Prevent delayed and missed payments with an automated invoicing system that:
• Sends invoices promptly
• Includes all the necessary information
• Offers several convenient ways to pay
• Tracks and contacts delinquent payers
Reconcile Your Bank Account Every Month
This means checking that the transactions listed on the bank statement match what you have in your books. Identify any discrepancies and find out why they happened.
Usually, it’s something simple like a transaction that’s recorded in your books but the bank hasn’t processed it yet. Or it could be a more serious problem such as data entry error, misunderstandings of how to use the bookkeeping system, or even theft.
Figure Out Worker Pay and Taxes
Your business may pay one or more of these types of compensation:
• Salary employee
• Commission employee
• Salary plus commission employee
• Independent sub-contractor
Ideally, you’ll have payroll software that can calculate them all, as well as track them for income tax withholding. Fees to independent contractors may be handled separately by accounts payable, since these workers are not by definition your employees.
You’ll also need to learn which tax forms to collect from employees (W-2) and contractors (1099), as well as how to report their income to the IRS.
Take the Easy Way Out
If all this seems overwhelming, consider outsourcing it to financial professionals. Xendoo specializes in small business accounting, and we’ll relieve you of all that work and worry with services that range from real-time bookkeeping to timely financial reports to payroll. See for yourself with a one month free trial.