Property Accounting: The Ultimate Guide (2024)

Effective property accounting is crucial for the success and financial health of your property portfolio. Whether you manage office buildings, retail spaces, or industrial properties, understanding and applying sound accounting principles can help you maximize rental income, minimize expenses, and make informed decisions that enhance the profitability of your properties.

In this guide, we’ll walk you through the essentials of commercial property accounting, including key accounting principles, practical tips, and best practices. We’ll also cover important financial reports and the benefits of using property management software tailored for commercial properties.

What is property accounting?
What are the benefits of good commercial property accounting?
What are the main accounting principles for property management?
How can you set up your property accounting system?
What are financial reporting best practices?

What is property accounting?

Property accounting stands as the backbone of effective commercial property management. This meticulous process involves the systematic recording, classifying, summarizing, and reporting of every financial transaction that touches your commercial properties. It's not just about keeping the books in order; it's a comprehensive approach to maintaining financial control, ensuring strict compliance with various regulations, and providing detailed, accurate reports to property owners and stakeholders.

The scope of property accounting is broad, covering a range of key activities essential for the smooth operation of any commercial property. At its core, managing rent payments efficiently ensures a steady cash flow, the lifeblood of property operations. But it's more than just collecting rents. It's about tracking every penny that goes in and out in terms of operating expenses, which can range from maintenance costs to utility bills, ensuring that every expense is accounted for and optimized to maintain or even reduce overheads.

Reconciling bank accounts is another critical activity, providing a fail-safe check to ensure that the financial records match the actual bank statements, catching any discrepancies early, and maintaining an unimpeachable level of financial integrity. This rigorous process provides a clear and accurate picture of the property's financial status, which is indispensable for strategic planning and decision-making.

Preparing financial statements, meanwhile, is about bringing all these pieces together to tell the financial story of your property. These statements are not just retrospective reports; they are forward-looking tools that enable property managers to assess financial performance, identify trends, and make informed, data-driven decisions to drive the financial health and growth of their properties. They serve as a critical communication tool, providing property owners and stakeholders with a transparent view of where their investment stands and where it's headed.

What are the benefits of good property accounting?

Effective property accounting unlocks a plethora of benefits, such as:

Boosted Rental Revenue: Through meticulous tracking of receivables, tenancy rates, and revenue patterns, property managers can fine-tune rental prices, diminish empty units, and escalate rental earnings.
Reduced Operational Costs: In-depth accounting sheds light on all expenses, CAM reconciliation, enabling managers to pinpoint opportunities for cost savings or efficiency gains.
Enhanced Cash Management: Precise bookkeeping guarantees the availability of funds for operating expenses, upkeep, salaries, and owner payouts, while forecasts of cash flow aid in strategic financial planning.
Compliance Assurance: Maintaining accurate financial records and reports ensures adherence to accounting norms and tax laws, minimizing the likelihood of audits and fines.
Superior Financial Reporting: Robust financial reports allow property owners to consistently evaluate the performance of their investments and compare crucial indicators to industry benchmarks.
Empowered Decision Making: Armed with comprehensive financial data, managers possess the insights needed to make informed choices regarding rental pricing, property enhancements, acquisitions, divestitures, and beyond.

What are the must-know account principles for property management?

Understanding core accounting principles is essential for setting up and maintaining accurate financial records. Below are some foundational concepts:

Cash Basis vs. Accrual Basis Accounting

Cash Basis Accounting:
In this method, income and expenses are recorded when cash is received or paid. This approach is simpler but may not provide a complete picture of financial performance.

Accrual Accounting:
Accrual accounting records income when it is earned and expenses when they are incurred, regardless of when cash is exchanged. This method, required under GAAP standards, offers a more accurate view of long-term financial health and is commonly used by larger commercial property management companies.

Generally Accepted Accounting Principles (GAAP)

GAAP provides standardized guidelines for financial accounting, ensuring consistency, reliability, and comparability across different entities. Key GAAP principles for property managers include:

Revenue Recognition: Record revenue when it is earned.
Matching Principle: Match revenues with related expenses in the same period.
Consistency: Apply accounting methods consistently over time.
Disclosure: Clearly disclose accounting policies and assumptions.
Asset and Liability Classification: Properly classify and present assets and liabilities.

Double Entry Bookkeeping

This method requires every financial transaction to be recorded in at least two accounts, ensuring that the books are always balanced. For example, when rent is paid:

Debit: Cash
Credit: Rental Income

Double entry bookkeeping provides a clear audit trail and minimizes errors, making it a critical component of accurate property management accounting.

CAM (Common Area Maintenance) / Service Charges / Outgoings Budgeting

This is a pivotal aspect of property management accounting, especially for commercial properties. This practice involves estimating, allocating, and reconciling expenses related to the maintenance and operation of shared spaces or services. Accurate budgeting and tracking of these costs are crucial for the financial stability of property management operations.

At the beginning of the fiscal year, property managers should estimate the total cost of CAM, service charges, and outgoings based on historical data, planned improvements, and inflation rates. These costs are then allocated to tenants based on their lease agreements, which often outline the proportion of shared expenses each tenant is responsible for. This process requires meticulous planning and clear communication to ensure fairness and transparency.

Then at the end of the fiscal period, actual expenses are compared to the budgeted amounts. Differences between the estimated and actual costs are reconciled, leading to adjustments in future budgeting cycles or tenant charges. This step is critical to maintaining trust between property managers and tenants, as well as ensuring the financial health of the property.

How can you set up your property accounting system?

Establishing a reliable accounting system is the cornerstone of effective financial management. The following steps will help you set up a robust system:

Choose the right accounting software

Selecting the right property accounting software is crucial. Options like QuickBooks, Xero, Sage Intacct and Netsuite offer specialized accounting software. Consider the number of properties you manage, your budget, and the specific features you need when choosing software. All of the mentioned options offer cloud-based solutions which are particularly beneficial for accessing your data from multiple locations.

Our recommendation is that businesses stick to specialist accounting systems for their Accounting needs and utilise property management solutions that have extensive integrations into the accounting systems. Property management solutions that have built in accounting systems have limited functionality on the accounting side.

To learn more about how to pick the right accounting systems you visit - 5 Benefits of Integrated Property Accounting Systems

You can also investigate how we connect to different specialized accounting systems by viewing our integrations below.

Setting up a chart of accounts

Your chart of accounts is a structured list of all the accounts you need to track, categorized into assets, liabilities, equity, income, and expenses. Properly setting up your chart of accounts is essential for accurate financial reporting. Use block numbering to organize accounts systematically, making it easier to manage and retrieve financial information.

For more information about setting up your chart of accounts you can dig deeper at Setting up a Chart of Accounts: How and Why?

What are financial reporting best practises?

Regular financial reporting is critical for monitoring property performance and making informed decisions. Implement these best practices:

Generate Monthly and Quarterly Reports: Regularly produce reports that provide an overview of income, expenses, cash flow, and other key metrics for each property and the overall portfolio.
Create Budgets and Cash Flow Forecasts: Develop annual budgets and monthly cash flow forecasts to anticipate financial needs and track performance against expectations. It's very important to ensure you have CAM/ Outgoing/ Service Charge budgets setup and in place in a way that makes the reconciliation process easy to perform in the future. We have factored this into the Re-Leased product to ensure that this process is as easy as possible.
Benchmark Against Other Properties: Compare your properties’ financial metrics with industry standards to identify strengths and areas for improvement.
Present Reports in Clear, Actionable Formats: Use charts, graphs, and tables to make reports easy to understand and actionable for different stakeholders.
Document Sources and Variances: Include footnotes that explain data sources and variances to provide context and transparency.

Benchmarking and Reporting in Re-Leased is built to ensure you can access all the information your need within a couple of clicks aswell as allowing for customer reporting through our Insights product.