There are distinct differences between cash accounting and accrual accounting methods. When setting up your property management company for the first time, you’ll have to choose which of these property management accounting methods you will be using for recording accounting transactions. While many large companies should use the accrual accounting method, some smaller management companies may find that the cash accounting method suits their business better.
While there are many differences between these two accounting methods, the major difference is that when businesses record transactions using cash accounting, the transactions are recorded when money is received or money goes out. In other words, when you receive a rental payment in the month of May, it is recorded as income received even if the rental payment is for June.
The same goes when paying bills. If you receive a phone bill for $100.00 that is for the following month, the expense of paying that bill will be recorded when the cash goes out – when you pay the bill. For smaller management companies with just a few properties and routine bills, this method may work fine. But many smaller companies often find themselves outgrowing the cash accounting method quickly.
The accrual accounting method records income and expenses when they occur, not when they are paid. If you invoice a tenant for June rent, rental income will be recorded in June. It doesn’t matter if the tenant pays May 31st, the income will still be recorded in June.
The same goes for expenses. If you receive a phone bill for June phone service, it will be expensed in June, even if you don’t pay the bill until July. As income and expenses are recorded in the actual month in which they occur, the resulting financial statements are more accurate, and are able to present a more complete picture of the financial health of your business.
Using accrual accounting also allows property management businesses to account for other items in their financial statements such as long-term assets, or other miscellaneous expenses such as the cost of employee benefit plans and retirement funds.
So, new business owners or those converting over to a property management software system for the first time; be sure to take some time to think about which method will work better for your business. If you’re still unsure, talk to an accounting professional who can guide you to the accounting method that is right for your company.