Category: Bookkeeping Practices

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Bank Accounts – How Many Should I have and Why?

One of my favorite things about helping business owners, particularly landlords, is discussing systems and processes. There is just something about providing solutions for a client and seeing that look on their faces that makes me happy.

One of the items on my list of implementable systems is Bank Accounts. For a rental property business, the setup of your banking information, as it pertains to your business, is crucial to creating and maintaining an efficient operation.

Let's get right into it.

The number of bank accounts I recommend any rental property business have is 3. An Operating account, a Security & Key Deposit account, and a Repairs account. The reason why I recommend having these accounts is because it helps keeps monies separate and helps ensure there is a reserve in case of large repairs.

The Operating account is where the rent goes. It is also the account that expenditures for business will come out of. Expenditures like office supplies, business credit card payments, and payments made to contractors. Owner's Draws can be taken from this account, too. You want to make sure to keep things simple with this account. Try to avoid paying for personal expenses out of this account. Simply do an owner's draw instead and transfer the funds to your personal account.

Next up, Security & Key Deposit account. This account is strictly for REFUNDABLE deposit payments, i.e. Tenant Security and Key Deposits. Some states even REQUIRE that these funds are separate from rental income. In the opinion of this bookkeeper, these funds should be separate no matter what the law says. If there is damage to the unit, the funds should first come from this account, out of the individuals security deposit and then from the repair account. Once the repairs are finished, you want to send the receipts to AMH so that I can properly invoice the tenant.

Lastly, your Repairs account. This account is so important. As you well know, the city can impose new ordinance requiring a new garbage enclosure on pavement for multifamily or that all driveways must be paved for single family and these updates to be compliant can cost THOUSANDS. Having this account set up will put you in a better position to handle those things, whenever they come up. The 2 sole purposes for this account is to offset the cost of getting a unit back in shape after a tenant WHEN the funds from their security deposit isn't enough to cover the repairs AND for compliance construction, updates, and major repairs like the roof, basement, etc.

It is always best to keep these funds split out so you can see exactly where you are with income, if you need to move some money for a major repair, and exactly how much is in your deposit account. If you have been operating your business from 1 account and would like to implement this strategy, schedule a call with AMH. I can help.

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Recording & Reconciling 3rd Party Merchant Payments

Discrepancies occur often with bookkeeping and one of the most popular I have seen is during the reconciliation with 3rd party payments.

There is usually a 1-3 day turnaround before funds paid by a 3rd party are deposited into a business' checking account.

For example:

  • Company A performs Jobs for Companies 1,2,and 3, respectfully, on 3/30/XX.
  • March 30 is on a Monday.
  • Companies 1 and 2 pay via check and company 3 pays via credit card.
  • Checks are recorded and deposited Monday, March 30 at 4:30; the credit card payment is recorded on March 30.
  • Reconciliation is performed April 1 including the credit card payment which has not cleared the bank at the time the reconciliation is completed.
  • This results in a discrepancy in your bank reconciliation which will continue to affect all other reconciliations in the amount of the credit card payment.

It is important that you verify when deposits hit your bank by logging into the business' operating bank account and matching those deposits with payment received via 3rd party merchants that processes your credit card transactions. Doing this before you reconcile will save you or your bookkeeper countless hours in unreconciling and re-reconciling to correct the issue.

If you have found issues like this and others, contact AMH immediately and let us help you unravel it!

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Efficiency: ACH for Rent Payments

In part two of the Efficiency series, I am going to discuss rent payments; specifically the most efficient way to receive payments that can "kill two birds with one stone" for your rental business. First let's discuss the most common ways rent is paid.

  1. Cash - This method is a bit antiquated but still acceptable. Lends itself to being spent before being deposited into the rental checking account and understates the income received. Aside from that, proper handling isn't always completed. When receiving cash payments for rent, AMH recommends that a receipt, signed by the property manager or landlord, be given to the tenant, that the payment gets recorded into the accounting system, and a deposit slip is immediately made for that payment listing the address and tenant the payment came from. Multiple cash payments can go on one deposit slip.
  2. Check - Another acceptable and somewhat antiquated method of payment. There are benefits for the tenant in being able to pay rent via check not for the landlord or property manager. For tenants, particularly if they are using a checkbook with the carbon copy feature, have written proof that a check was written for their rent. For the landlord there is the risk of the check bouncing, being a fraudulent check to begin with, and that means you are out of rent. This isn't always the case but it does happen. When receiving a check, AMH recommends the same procedures for handling a check as we do cash. In addition with mobile deposit being available a most banks, you can skip the deposit slip step and deposit that check via the mobile deposit capabilities at your bank, if applicable.
  3. Money Orders - Like checks but are more secure in terms of they do not bounce. To obtain a money order, the purchaser MUST have the money on hand for the amount of the money order they are purchasing. Money orders can be deposited via mobile deposit just like checks. Again, AMH recommends following the aforementioned handling methods aside from the deposit slip. Use the mobile deposit feature to deposit the money order just like you would with a check.

Now for some new ways rent is being paid.

  1. Venmo
  2. Zelle
  3. Cozy
  4. Cashapp
  5. SparkRental
  6. Tenant Cloud

All of the above are methods to pay or send money to someone effortlessly. The aps above make it so tenants don't have to leave their homes to get their rent paid. The apps are made available for smartphones and with a few simple touches to the screen, the rent is paid. AMH is not familiar with the process involved with the apps listed above and cannot give any advice other than to immediately record the payment and issue a signed receipt to the tenant.

Lastly, the method we HIGHLY recommend for receiving rent payments is ACH transfers from the tenant's bank account to the landlord's or property management company's bank account. Often run a few days before the 1st, this method all but guarantees no late fees AND acts as a great pre-screening qualifier for obtaining your ideal tenants.

Although some of the apps mentioned above can deliver funds much more quickly, ACH has more advantages for the overall performance of your business. Efficiency is key here and ACH allows for that much more so than the other payment methods discussed above.

For more information on ACH payments, schedule a consultation HERE.

AMH Bookkeeping, LLC. The Landlord's Bookkeeper.

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Schedule C & E: Using These Forms for the Setup of Your Accounting System

Schedule C

Depending upon your entity type and industry for your business, setting up the books for bookkeeping can be quite simple. For the purpose of this post I am going to discuss the two setups I am most familiar with.

The first is based upon the IRS Form Schedule C. Page one of the form handles the income and expenses of your business to arrive and the profit and loss. The business expense categories listed are all that is needed in your accounting systems' Chart of Accounts. Having this form handy keeps the Chart of Accounts clean and streamlined. You can always add sub-accounts for the things you want broken down for reports to be used internally.

Another form I like to use as a reference is the IRS Form Schedule E. I love this form because my specialty is rental property accounting and it helps keep my clients Chart of Accounts clean as well. Page one of this particular form deals with the income from rent or royalties and the other page deals with other kinds of passive income such as income from Partnerships or S Corps. For this purpose, only the rents concern us. When you have property that you allow others to use, you must report all the income and expenses for EACH property, using multiple sheets for multiple properties, on the Schedule E.

Schedule E

Using a combination of these forms, in particular the listing of expenses on each, and the classes feature in QuickBooks, the Chart of Accounts will be comprehensive and will make creating a tax return a lot easier as all of the information for these two forms will be incorporated into the business books. This method keeps thing simple, organized, and clean; just one aspect of quality you can expect from AMH Bookkeeping, LLC. For more information on our setup process or to work with AMH, schedule your consultation HERE. AMH Bookkeeping, LLC...Your Books. Clean and Simple. 

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QuickBooks for Property Management: Owner/Tenant Workflow

Now that we have classes, tenants, and owners all set up, it is time to talk how these three things will flow together. The workflow for property management does not have to be daunting. The goal is to make it simple, easy to follow, and repeatable. Let's dive right in!

Step 1: Assessing Rent Charges to Tenants

Statement charges are a great way to assess the charge for rent. It is a register for each tenant that shows all the transactions that involve that tenant. The process for assessing a rent charge this way is very simple.  Open the tenant register and input the charge for rent.

Step 2: Collecting Rent from Tenants

Next, process the payment from that tenant. You can right click on the tenant name and choose receive payment. Here, it is imperative to make sure you have the right account listed that you want the payment to post to. If you do not have a main account where all tenant payments are kept, please pay attention to this. It will save a lot of headache in the long run.

Step 3: Paying Owners

Enter what you owe the owners as a bill minus your property management fees. You can do this by selecting the owner's name from the Vendors list, right click, and choose "enter bills". This step is important as it will leave a trail of what has happened and as a check and balance of whether an owner received their rents or not.

In the memo line you can denote that the amount listed is net of property management fees.

Once the bill is entered, write a check from the property management firm to the owner. Even if you use ACH, use the check writing feature and use ACH as the check number.

For the majority of your business this is the going to be THE most performed workflow. Keeping it simple lessens the risk of mistakes and missed payments. AMH Bookkeepers are well versed in bookkeeping for landlords. Let us take this work off your hands. Schedule your free consultation today.

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QuickBooks for Property Management – Owners

As many of us know, there are several schools of thought on the best processes for any business when using QuickBooks. Property Management is no different. In this series you have learned about using classes and the best practices for setting up a class as well as how to set up your tenants. Like these two sections,  setting up owners also comes in several methods. The method I practice is to use the Vendor Center in QuickBooks.

Why setup an owner as a vendor when they are your customer?

The reason for this is simply because getting their rents to them is a liability to the property management firm just as a bill for utilities is. It also makes your workflow smoother.

We will get more into workflows under this method of property management in a later post for now let's continue discussing setting up owners. There are two ways that owners can be listed as vendors. One way is to use the "address first owner name" method that is similar to setting up a tenant. This way works well for owners with only one property. The other is  using the owner name for those with multiple properties. Using the owner name overall in your vendor list will work regardless of number of properties, however, it is the opinion of this bookkeeper that associating addresses for single owner units will keep data entry errors down.

Using the owner's name in the Vendor list also makes it easier to cut the checks for the rent. This eliminates the need to issue credit/debit memos and keeps the books looking clean. For self-managing landlords, this is a non-issue.

For more information on setting up your owners in QuickBooks desktop, schedule your FREE, no obligation consultation with AMH.

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New SBOs & Bookkeeping

Congratulations on starting your new business venture! It is challenging and rewarding and no day is the same. The key to making it all work is to automate and delegate when and where you can. One of the best things to both automate AND delegate is your bookkeeping.

Starting your business with good bookkeeping practices early, will take a large load off your plate down the road. It is easier to catch mistakes in the beginning than it is to catch them in the end. These mistakes can be extremely costly and come with other consequences such as jail time or seized property if not caught and corrected in time.

Do not be worried about having the money to pay for a professional regularly. My recommendation is to find a professional that understands your industry first. Be intentional. The goal is to find YOUR bookkeeper/accountant. Explain to them what you are looking for and what you need starting out and sign on to work with them.

For example: You are starting an Etsy store and you have some inventory just recently purchased for the products you make.

What you need: A bookkeeper/accountant who understands e-commerce, particularly the Etsy space and 3rd party merchants that work with Etsy. In this scenario, the bookkeeper/accountant can create an Excel workbook for you that includes a place for customers, inventory tracking, cost of goods sold, additional items list, and your reports so that when you are ready to move to a sophisticated accounting system, the transition will be seamless; all while monitoring the workbook for errors, omissions, categorization errors, etc.

The professional bookkeeper/accountant can set up your accounting system, create your chart of accounts, and input all the information from your spreadsheet into your accounting system; giving you your historical data as well as the current data.  Your chosen professional is there to advise you on the financial health of your business, offer cost/benefit analysis on any new endeavors, keep you abreast of all the new tax laws, and do their best to help lower your tax liability and increase your profits.

As new business owners, you may not think you need the accounting right now. You may even have others in business that you know tell you that they waited. Do not let them distract you. It is always better to have this system set up right in the beginning when the chances of IRS audits are low than to spend thousands of dollars getting the mistakes corrected because you are being audited.

AMH Bookkeeping, LLC can help. Schedule your discovery call now and let us get you started on the right foot with your financial management.

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Financial Statements: More than just a P & L.

Profit. This is the buzzword that drives businesses today. How PROFITable were we? Yes, but what was the PROFIT margin? Of course profit is important. If a business is not profitable, it will not survive. One way that most companies find out their profitability is with a Profit and Loss Statement or an Income Statement.

This document totals all income streams a business has and subtracts out all of its expenses to get was is called a Net Income if the income is more than the expenses or a Net Loss if the reverse is true. It does not take into account any outstanding liabilities the company has and this is one of the reasons why it should not be the primary focus when it comes to your financial statements.

To better gauge the financial fitness of your business there are some other financial reports you should add to your monthly statement review.

  • Balance Sheet – The reason it is imperative to review this document is because this is where you will find accumulated depreciation and liability errors.
  • Statement of Cashflows – This shows you how your money moves. Reviewing this document frequently will help your company prepare for the rise and fall of your cash flow.
  • KPI (Key Performance Indicator) Statements – Often created for internal use, tracking the average dollar amount spent by customer, city with highest sales, or most purchased item can also aid in determining the direction your company wants to continue to remain profitable and grow.

Periodical reviewing of the Balance Sheet will let know what your liabilities are and this will aid you in determining what your ‘Working Capital” is. To me, working capital is defined as all the money left over from any and all financial obligations such as expenses, liabilities, and other lines of credit. This number can also include a percentage you, as the owner, would like to retain as profit.

In combination with the 3 reports listed, your financial statement analysis can become the springboard that launches your company into the stratosphere.  Major financial decisions can be made when reviewing these 4+ reports for example, diversifying investments, consolidating debt, establishing another line of credit, and much more. Let AMH help you understand your numbers and advise you on your options.

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SBOs Shouldn’t Commingle Business and Personal Funds

As a bookkeeper, one common issue that I see with small business owners is the commingling of personal and business funds. It usually begins as a small purchase being made for the business accidentally with personal funds or vice versa. This is not a big deal if it is a one-time thing. When it becomes common place, larger issues can arise and the following questions need to be answered:

  1. For those personal purchases made using the business funds, are they being paid back to the business?
  2. Is the business paying the owner back for expenses made using personal funds?
  3. Are those business expenses that were made via personal funds being treated as an equity investment instead?
  4. Are the personal expenses paid for by business funds being treated as an owner draw?
  5. How will they affect the business and personal tax deductions?

Aside from answering the above questions, deciphering what was a personal expense and what was a business expense so that your business receives optimal tax deductions and credits is CRITICAL. The time it takes your CPA or EA to do this can cost you thousands.  In situations like these, having a bookkeeper handle your day to day financial data entry is beneficial. Your bookkeeper can catch these transactions and handle them accordingly so they do not cause long term issues with your financials as well as establish systems to prevent the commingling from happening again.

The best way to prevent the pitfalls of commingling is to stay away from this practice completely. Here are a few ways to make sure your business and personal funds remain separate.

  1. Have separate checking accounts.
  2. Do not maintain your personal financial records in the same accounting software file as your business.
  3. Leave your personal cards at home or locked in a file cabinet when working on your business and vice versa.
  4. Review your bank and credit card statements regularly and notify your accountant or bookkeeper of any misclassification of transactions.
  5. Become proactive with your bookkeeping. Taking part in the data entry or reconciling of your financial records gives you a detailed view of how clustered things can become when funds are commingled.

You do not have to tackle this alone. AMH Bookkeeping, LLC is here to help you sort through things and get you back on track with accurate, clean, and current financial records. Schedule your consultation today!

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