Why You Need a Monthly Accounting Cycle (+ How to Set It Up)
As a landlord, you probably understand the importance of keeping track of your finances, and one way to do this is by following the accounting cycle.
The accounting cycle is a set of steps that must be followed to record financial transactions and prepare financial statements.
In this article, we will explore the purpose of the accounting cycle, how it works, and the eight steps involved in the process.
The Purpose of the Accounting Cycle for Landlords
The purpose of the accounting cycle is to provide accurate and reliable financial information to individuals and businesses during the accounting period.
For landlords and property managers, this means keeping track of rental income, expenses, and other financial transactions related to your rental properties.
Following the accounting cycle can ensure that your financial records are up-to-date and that you are making informed decisions about your properties.
But, how does it work? Let's discuss this in the next section.
How the Accounting Cycle Works
The accounting cycle is a continuous process that begins with recording financial transactions and ends with the preparation of financial statements (such as a cash flow statement).
The process involves several steps, each of which builds on the previous step to ensure that financial information is accurate and complete.
The 8 Steps In the Accounting Cycle
Now that you understand the purpose of the accounting cycle and how it works, let's discuss its 8 crucial steps.
1. Identify and Analyze Transactions
The first step in the accounting cycle is to identify and analyze all financial transactions related to your rental properties.
This includes rental income, expenses, and any other financial transactions that affect your business.
2. Record Transactions In the Journal
Once you have identified and analyzed all financial transactions, the next step is to record them in the journal.
The journal is a chronological record of all financial transactions and serves as the basis for all accounting records, many people use property management or accounting software to keep this information.
3. Post All Journal Entries to the Ledger
After transactions have been recorded in the journal, they must be posted to the ledger.
The ledger is a permanent record of all financial transactions and provides a detailed account of your financial activities.
4. Prepare a Trial Balance
Once transactions have been recorded in the ledger, a trial balance is prepared to ensure that debits and credits are equal.
This step helps to identify any errors in the accounting records.
The unadjusted trial balance is a list of all the accounts and their balances before any adjustments are made and is used to ensure that the total debits equal the total credits.
The adjusted trial balance, on the other hand, is a list of all the accounts and their balances after adjusting entries have been made. It is used to ensure that the total debits still equal the total credits after adjustments have been made.
The adjusted trial balance is the final step in the accounting cycle before preparing the financial statements, so stick around to learn more about it.
5. Make Adjusting Entries
After the trial balance is prepared, adjusting entries are made to ensure that financial information is accurate and complete.
Adjusting entries are necessary to account for transactions that occur outside of the normal course of business, such as depreciation or accrued expenses.
6. Prepare Worksheets
Worksheets are used to summarize financial information and to prepare financial statements.
They provide a framework for organizing financial information and help to ensure that financial statements are accurate and complete.
7. Prepare Financial Statements
Financial statements are prepared using the information from the journal, ledger, and worksheets.
The three primary financial statements are the income statement, balance sheet, and statement of cash flows.
8. Post Closing Entries to Close the Books
After financial statements have been prepared, closing entries are made to close the books for the accounting period.
This step ensures that financial information is accurate and complete for the next accounting period.
Post Adjusting Journal Entries to General Ledger
After preparing the worksheet, post the adjusted journal entries to the general ledger.
This involves updating the ledger accounts to reflect the adjustments made during the previous step.
Adjusting journal entries are made to correct errors, allocate revenue and expenses to the correct period, and adjust for the use of assets over time.
Adjusting entries for landlords includes recording depreciation expenses for rental properties, recognizing rental income that was earned but not yet received, and recording prepaid expenses such as insurance.
Once the adjusting entries have been made, they are posted to the appropriate accounts in the general ledger. This ensures that the ledger accurately reflects the financial transactions of the landlord's business.
Posting the adjusting entries to the general ledger is a critical step in the accounting cycle because it ensures the accuracy of the financial statements. By accurately reflecting the financial transactions of the business, landlords can make informed decisions about their investments and financial future.
Timing of the Accounting Cycle
The accounting cycle for landlords is an ongoing process that typically follows a set schedule.
The timing of each step in the cycle can vary depending on the landlord's specific business needs, but it generally follows a monthly or yearly schedule.
For example, landlords typically close their books and prepare financial statements at the end of each month or year.
This allows them to analyze their financial performance and make informed decisions about their business.
It's important for landlords to stay on top of their accounting cycle and complete each step in a timely manner. Failure to do so can result in inaccurate financial statements and potentially costly errors.
In addition, completing the accounting cycle in a timely manner can help landlords identify areas where they can improve their financial performance. For example, by analyzing their income and expenses on a regular basis, landlords can identify ways to reduce costs or increase revenue.
Overall, the timing of the accounting cycle is an essential component of effective financial management for landlords. By following a consistent schedule and completing each step in a timely manner, landlords can ensure the accuracy of their financial statements and make informed decisions about the future of their business.
In conclusion, following the accounting cycle is crucial for landlords and property managers to keep track of their finances accurately and efficiently.
The purpose of the accounting cycle is to provide accurate and reliable financial information to individuals and businesses, and for landlords, it means keeping track of rental income, expenses, and other financial transactions related to their rental properties.
The accounting cycle involves eight critical steps, starting from identifying and analyzing transactions and ending with post-closing entries and is an ongoing process that follows a set schedule and requires timely completion of each step to ensure accurate financial statements and informed decision-making.
By following the accounting cycle consistently, you can improve your financial performance and secure a prosperous financial future for your businesses.