25 Important Accounting Terms to Learn
As a property manager, you are responsible for managing the finances of the properties you oversee.
Understanding accounting terms is critical for making informed decisions about budgets, expenses, and investments.
Without this knowledge, you may make costly mistakes that can impact your business and the bottom line.
For instance, not knowing how to read financial statements can lead to missed opportunities or even financial losses.
So, in this guide, we will be going over a collection of the generally accepted accounting principles and terms that every landlord and property manager should know.
To begin, let's go over why knowing these accounting terms is important and how knowing them is going to help you in your property business.
Importance Of Knowing Accounting Terms
By understanding these terms, property managers and landlords can better communicate with accountants and other financial professionals, as well as make informed decisions about budgeting, forecasting, and investing.
For example, understanding the concept of "gross income" can help property managers and landlords calculate the total revenue generated by their properties before expenses, while "net income" can help them determine the actual profit after all expenses are deducted.
Knowing the difference between "capital expenditures" and "operating expenses" can help them distinguish between expenses that improve the value and cost of goods sold the property over time versus expenses necessary to maintain day-to-day operations.
Additionally, being familiar with terms such as "depreciation," "cash flow," and "return on investment" can help property managers and landlords evaluate the financial health of their properties, their capital gains as well as determine the potential profitability of future investments.
Overall, knowing property accounting terms is essential for property managers and landlords to effectively manage their properties and make informed financial decisions.
So, without further ado, let's get into some of the more basic (or, rather, foundational) accounting terms.
Part I: Basic Accounting Principles
Accounting is the process of recording, classifying, and summarizing financial transactions to produce financial statements.
It provides a systematic and organized approach to track the financial health of a business or organization.
Accounting helps to provide information to business owners and investors to make informed decisions regarding their company's financial transactions.
And, at the heart of every sound accounting system, there are several foundational principles:
Account Types (Learn These!)
There are five main types of accounts in the accounting system:
- Assets - Assets are resources that a business owns and uses to generate revenue. They can be tangible (such as cash, property, or equipment) or intangible (such as patents or copyrights).
- Liabilities - Liabilities are debts that a business owes to others, including loans, accounts payable, and taxes.
- Equity - Equity represents the net worth of a business after liabilities are subtracted from assets. It includes contributed capital and retained earnings.
- Revenue - Revenue is the income that a business generates from the sale of goods or services.
- Expenses - Expenses are the costs that a business incurs to generate revenue, including salaries, rent, and supplies.
Debits & Credits
Debits and credits are used to record financial transactions in accounting.
Debits are used to record increases in assets and expenses, while credits are used to record increases in liabilities, equity, and revenue accrued expense amount.
For example, if a business purchases equipment for $10,000 cash, the accounting entry would be:
Debit: Equipment $10,000 (increase in asset) Credit: Cash $10,000 (decrease in asset)
Balance Sheet & Income Statement
The balance sheet and income statement are two important financial statements in accounting.
The balance sheet provides a snapshot of a business's financial position at a specific point in time, by showing the current assets, liabilities, and equity of the business.
It helps to provide information on a business's liquidity, or its ability to pay off short-term debts.
The income statement shows the revenue, expenses, and net income of a business over a specific period of time. It helps to provide information on a business's profitability and financial health.
The income statement can be prepared using either the accrual accounting or cash basis accounting method.
So, now that we know about the most basic accounting terms, we can dive into some slightly complicated, lesser-known terms you should know.
Part II: 22 High-Importance Accounting Terms
As a property manager, you should be familiar with the specific accounting terms that are commonly used in property management accounting.
In this section, we will discuss the most important property management accounting system terms that you should know to properly manage your properties and finances.
An accounting period is a period of time within a financial statement. Typically, this is either one or several days, months, or years.
If you've ever run a report in QuickBooks or another similar accounting software to see your revenue, expenses, or otherwise, you'll recognize that every report uses an accounting period.
Accounts payable refers to what your business currently owes from vendors.
This is always either a product or a service that you use to run your business in some form, such as the bill for a contractor to fix a property.
The flip side of your chart of accounts not payable, this is what you're currently owed for your services. Any open invoices or unpaid fees, or rent balances go here.
Cash Accounting Method
The cash accounting method records transactions when they're either paid, or payment is received (depending on whether you're paying a bill or receiving a payment from a tenant).
Sole proprietors often use this method as it's an easy way to manage your accounting in the early stages. However, all businesses with employees are required to use the accrual accounting method (see the next point below).
Accrual Accounting Method
This is a method of accounting that records transactions based on the transaction date, as opposed to recording the transaction when you send or receive payment. Any business with employees is required to use this accounting method.
Your general ledger, or G/L for short, is a complete record of all your business transactions. Chances are, if you use a basic accounting software already, this is generated automatically as you input transactions.
You need to regularly– often monthly– make sure that your G/L or general ledger (see above) and the actual statement balance across your business bank accounts match up. Making sure that's the case is the process of bank reconciliation.
Suppose your bank account is lower than your general ledger. In that case, you need to identify what transactions weren't recorded in your general ledger and add them in to ensure you're keeping accurate records.
A rent roll is a financial statement that lists all the rental units in a property, the rent amount, the rental term, and the lease expiration date.
This document provides a snapshot of the rental income and the occupancy status of the property. Property managers use rent rolls to track the rental income, vacancies, and lease expirations.
Operating expenses are the costs associated with running a property. These expenses include property taxes, insurance, utilities, maintenance, repairs, and property management fees.
Property managers must accurately track these expenses to ensure that the property remains profitable and financially healthy.
Capital expenditures are expenses that are used to improve a property's value or extend its useful life.
These expenses include renovations, upgrades, and major repairs. Property managers must carefully plan and budget for capital expenditures to maintain the property's value and attractiveness to tenants.
"Cash flow statement" is the amount of money that flows in and out of a property over a specified accounting period.
Positive cash flow means that the property is generating more income than expenses, while negative cash flow means that the property is not generating enough income to cover its expenses.
Property managers must monitor the property's cash flow regularly to ensure that it remains financially healthy.
NOI (Net Operating Income)
Net Operating Income (NOI) is the income generated from a property after deducting all operating expenses.
NOI is a key metric used to evaluate a property's financial performance present value. Property managers use NOI to determine the property's profitability and value.
Gross Potential Rent
Gross Potential Rent is the total amount of rent that a property could generate if all rental units were occupied and rented at their full market value.
Property managers use gross potential rent to determine the property's revenue potential.
Economic Occupancy is the percentage of rental units that are occupied and generating rental income. Economic occupancy takes into account any concessions or rent discounts that are given to tenants.
Physical Occupancy is the percentage of rental units that are physically occupied by tenants. Physical occupancy does not take into account any concessions or rent discounts that are given to tenants.
Vacancy rate is the percentage of rental units that are not currently occupied by tenants. Property managers use vacancy rates to determine the property's rental income gross profit potential and to plan for future marketing and leasing efforts.
Concessions are rent discounts or incentives that are offered to tenants to encourage them to rent a unit or renew their lease. Property managers use concessions to attract and retain tenants and to fill vacancies.
Lease Expiration Schedules
Lease Expiration Schedules are a record of all the leases in a property, including the lease term and the lease expiration date. Property managers use lease expiration schedules to plan for future leasing and tenant retention efforts.
Market Rent is the rent amount that a property could generate if all rental units were rented at their full market value. Property managers use market rent to determine the property's revenue potential and to set rental rates.
Scheduled Rent is the total amount of rent that is due from tenants over a specified accounting period. Property managers use scheduled rent to track the property's rental income.
Collection loss refers to the unpaid rent or fees that a property management company fails to collect from its tenants or clients.
Collection loss can occur due to various reasons, such as a tenant's financial instability, disputes over lease agreements, or a lack of proper collection procedures.
Property managers need to track collection losses and take appropriate measures to minimize them.
Bad debt is the amount of money owed to a property management company that is unlikely to be collected. Bad debt is generally written off as a loss on the company's financial statements.
Property managers need to track bad debts and take appropriate measures to prevent them from happening.
Even though this list includes various accounting terms, it is far from conclusive.
There are so many other terms and topics in accounting that can be learned in order to have a full understanding of your property accounting.
So, if you want to learn more about property management software accounting, continue reading.