Important Rental Property Accounting Terms for Landlords
When it comes to rental property accounting, it’s good to know the language.
The terminology can be complicated, and some people spend their entire lives learning about accounting.
In this article, we’re going to focus on key terms every landlord should understand.
The more you know about accounting, the more you can help your business, especially when it comes to preparing for taxes.
So, without further ado, let’s look at some critical accounting terms you need to know.
The Terms
Accounting Period
If you run reports in QuickBooks or other accounting software to review revenue and expenses, you’ll see that each report uses an accounting period.
An accounting period is an established range of time in a financial statement. It can cover several days, months or even years.
Operating Expenses
Operating expenses impact the daily operations of your business and are necessary to manage a rental property. It’s important part of accounting to know what are considered operating expenses. Below are some examples:
- Rent and utilities
- Accounting and legal fees
- Property taxes
- Business travel
- Wages and salaries
- Cleaning and maintenance
- Advertising
It’s important to make sure something is an operating expense before you categorize it as such. Thus, be sure to do your research on operating expenses.
Accounts Payable
Accounts payable refer to your short-term obligations owed to vendors or suppliers, which haven’t been paid yet.
This term always regards a service or product that you use to operate your business in some form (I.e., a bill for a contractor to fix a leaky faucet).
Accounts Receivable
Directly opposite accounts payable is accounts receivable. This refers to what you’re owed for your services. Any outstanding invoices, rent still due or unpaid fees go here.
General Ledger
The general ledger (G/L) is the entire record of all your business transactions. If you use accounting software, it generates this automatically as you enter transactions.
Fiscal Year
This term refers to the traditional 12-month period in which a property’s financial records are tracked. This isn’t necessarily the same as a calendar year because it won’t always start on January 1st.
Cash Accounting Method
The cash accounting method records transactions when payment goes through. Sole proprietorships often leverage this method because it’s a simple way to manage your accounting. That said, any business with employees must use the accrual accounting method.
Accrual Accounting Method
The accrual accounting method records transactions using the transaction date regardless of when payment goes through.
Bank Reconciliation
It’s important to ensure your general ledger matches your official bank statement. It’s wise to do this monthly if you can. The process of comparing these statements is called bank reconciliation.
Asset
An asset is something a business owns that has value. Land, accounts receivable and property are all examples.
Equity
The value of an asset once you subtract liabilities.
Revenue
This term refers to the income generated by your business over a certain period of time.
Overhead
Overhead refers to the total cost to run your business, excluding the actual service you provide. Thus, office rent, utilities and payroll are all examples.
Credit
Credit refers to every transaction appearing on the right side of an asset account. Credit indicates money leaving an account (e.g., decreasing an asset).
Debit
Debit, on the other hand, refers to every transaction appearing on the left side of an asset account. Debit indicates money going into an account (e.g., increasing an asset).
Depreciation
Depreciation is the mechanism for recovering costs on an income-producing property over the property’s expected life.
You can write this off on your annual taxes for certain items, so depreciation related to your assets is something you want to track.
Gross Profit
You can find gross profit by subtracting the costs of goods sold from your revenue.
Net Profit
Net profit equals your revenue minus every cost related to running your business. This figure includes your overhead costs.
Bookkeeping
Bookkeeping for property management is the process of recording your rental business’ financial records into organized accounts on a regular basis.
Liability
This term refers to something you owe or have borrowed. Examples are your mortgage, a loan and accounts payable.
Financial Statement
A financial statement is a report that provides information on the health of your business. Examples are balance sheets, profit & loss and income statements.
Conclusion
While this is by no means an exhaustive list of important rental property accounting terms, it’s a great foundation. Every term here is one that is useful to know and understand for any landlord.
