The Barrington Guide to Property Management Accounting: The Definitive Guide for Property Owners, Managers, Accountants, and Bookkeepers to Thrive

By PHILLIP GAVIN BARRINGTON

Catering to Real Estate owners, property managers, property bookkeepers and accountants, the Barrington Guide to Property Management Accounting utilizes short chapters, real-life examples, and easy to understand explanations of core concepts central to both property management and accounting. Whether you are an experienced property owner or a ne

• Language: English
• Publisher: Barrington Guides
• Release date: Nov 23, 2023
• ISBN: 9798989623600

Book preview

The Barrington Guide to Property Management Accounting

The definitive guide for property owners, managers, accountants and bookkeepers to thrive

Phillip Gavin Barrington

Barrington Guides

Copyright © 2023 Phillip Gavin Barrington

All rights reserved

No part of this book may be reproduced, or stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without express written permission of the author and publisher. While some examples herein are based on real-life, all names, amounts, and dates have been changed.

Disclaimer:  The information provided in this book is for educational purposes only, to assist in property management. It is not intended to be a source of financial or legal advice. Making adjustments to a financial strategy or plan should only be undertaken after consulting with professionals. The publisher and the author make no guarantee of financial results or success obtained by using this book, but we certainly think it will help!

ISBN-13: 979-8-9896236-0-0

Cover design by: Phillip Barrington

Library of Congress Control Number:

Printed in the United States of America

To my wife, Jessica, who I love with my whole heart

Contents

Title Page

Copyright

Dedication

Part 1: Introduction to Basic Accounting

1. Accounting History

2. Debits and Credits

3. The General Ledger and Journal Entries

4. Types of Accounts

5. Financial Statements

6. The Profit and Loss Statement

7. The Balance Sheet

8. Chart of Accounts

9. Bank Reconciliations

Part 2: Property Ownership, Property Management and Working with Tenants and Vendors

10. Property Types

11. Residential Properties

12. Commercial and Industrial Properties

13. Leases

14. Lease Types: All-in versus Triple-Net

15. Invoicing and Statements:

16. Common Area Maintenance (CAM) and Home Owners Association (HOA) Dues

17. Determining the correct amounts to bill for Triple Net Charges

18. Triple Net Reconciliations

19. Common Area Maintenance

20. Rent Rolls

Part 3: The Professionals: Assembling your Team and Choosing a Property Manager

21. Hire a Property Management Company (or Manage Yourself)

22. Managing it Yourself

23. Hiring a Property Management Company

24. Leasing Agents, Brokers, and Real Estate Lawyers

25. Hiring Contractors and Choosing Vendors

26. Choosing, and working with a CPA

27. Other Consultants

28. 1099s

Part 4: In Depth Accounting for Property Ownership and Management

29. Cash Basis and Accrual Basis Accounting

30. Cash Basis Accounting

31. Accrual Basis Accounting

32. Cash Basis or Accrual Basis Accounting; Which is Right for You?

33. Accounts Payable, Accounts Receivable and Bad Debt Expense

34. Fixed Assets and To Capitalize or Not to Capitalize

35. More Capitalization Items: Tenant Improvements, Buildouts, and Whiteboxing

36. Depreciation and Amortization for Accounting Purposes

37. Depreciation and Accumulated Depreciation

38. Amortization for Property Management and Accounting

39. How to Record a Purchase Closing Statement

40. Gain or Loss on Building Sale

Part 5: Sample Company: Broadway Avenue Property

Section 1: First Quarter, Year One

Section 2:  Financial statements

Section 3: Two Years Later

Section 4: Two Years Later: Financial Statements

Section 5: The Future

Section 6: Notes on Accrual Basis Accounting

Acknowledgement

About The Author

Books By This Author

Part 1: Introduction to Basic Accounting

Let's get it started

A brief history of accounting

Definitions of common accounting terms

An explanation of important financial statements

A review of bank reconciliations

This information will provide you with a solid accounting foundation, and use examples for Property Management.

1. Accounting History

Accounting has been around since humans began trading goods and services, soon after we moved from hunter-gathers to farmers. Some ancient civilizations kept meticulous accounting records on stone tablets that have survived to this day. These records reveal that the more things change, the more they stay the same.

Early accounting was more primitive, but as accounts grew larger, and trade became more extensive and global, people began looking for more efficient ways to account for transactions. It eventually led to what is now known as double-entry bookkeeping.

In 13th Century Renaissance Italy, double-entry bookkeeping was created by a monk named Luca Pacioli and we still use this method today. Double-entry bookkeeping means that for any transaction that occurs in a business that either involves money or will involve money there is a record of the transaction in at least two accounts (which we will expand more upon shortly). Most importantly, Pacioli established the basic accounting equation, which is:

Assets = Liabilities + Equity

This is easily interpreted as: Everything you own is equal to everything you owe plus your equity (ownership) in the company. Let us look at an example.

Example 1.1:

You purchased a property worth $10 million. You took out a loan of $9 million and paid $1 million of your own money to purchase the property. The accounting equation specific to this transaction is:

Property = Outstanding Loan + Investment

$10 million Property = $9 million Loan ​+$1 million Investment

Asset ​ ​= ​Liability ​+ ​Equity

The next step is recording the transaction. Every accounting transaction is recorded in the General Journal. The General Journal is the record of all accounting transactions that occur for a business. This is detailed on a report called the General Ledger which we will delve into further in a later chapter. Next, we will discuss how the transaction is recorded in the General Ledger using Debits and Credits.

2. Debits and Credits

Your first experience with debits and credits is usually with your personal bank statement. On the bank statement you see debits and credits. Whenever you deposit money into your account it is called a credit and a payment is referred to as a debit. (This is correct but not in the way many of us are used to). Debiting (or crediting) an account means that you either increased (or decreased) that account, depending on the account type. For every debit amount there must be an equal credit amount.

The most important distinction here is to never think of debits and credits in terms of positives and negatives. Rather think of them as either increasing or decreasing their account balance. How that works is based on the type of account it is. Let us look at an example.

Example 2.1:

You pay an electrician $1,500 to replace an electric service panel at one of your properties. This is an Expense Transaction. The journal entry to record this transaction is:

Debit: Electrical Repairs Expense for $1,500 (your expense increases)

Credit: Bank Account for $1,500 (your bank account decreases)

Example 2.2:

Here is an example of an Income transaction:

Your tenant pays you $2,000 for the monthly rent. The journal entry to record this transaction is:

Debit: Bank Account for $2,000 (your bank account increases)

Credit: Rental Income for $2,000 (your income increases)

Wait wait! you say, "When I take money in, I debit my bank account and when I paid that electrician isn’t that a credit? That’s not right, is it? Because when I look at my bank statement when money comes in it’s a credit on my account, not a debit. What gives?"

Here is the important distinction: these transactions are from the bank’s perspective, not yours (or your company). So, when you deposit money into your bank account you say, the bank credited my account and that is true, because from the bank’s perspective the person who paid you took money from their account (credit) and added it to yours (debit). However, on your books, the transaction increased your cash, which is a debit. Confusing, right?

The best way to combat this conundrum is to always think of the bank as backwards. Once you do that and know that every time money comes into your bank account it is a debit, you will easily solve what I call the bank conundrum.

Now let’s stop and take a breath (a deep breath, breathe in through your nose, hold it, and out through your mouth) and think about all you have just read about debits and credits. Let me take a guess – you just skimmed after you read the words debit and credit, right? That is perfectly fine, there is nothing wrong about being confused about debits and credits and having complete knowledge of them is not required to run a successful business. As we go along, we will look at more of the reasoning behind debits and credits, so there will be more opportunities to explore this concept. And really – you do not need to be an expert on debits and credits. But the knowledge of how they work is important when you are reviewing your financials and talking with your bookkeeper and/or accountant.

If you really want to understand