Accounting Question - Eviction losses
For you accounting types;
I was going through the 12 month P & L (cash basis) of my property (39 Unit) and found that I did not fully understand the delinquency line. In speaking to the PM company, I was told that the delinquency on the 12 month P & L tracked the monthly change in delinquency; if we started the month with a delinquency of $1000 on the first and at the end of the month it was $1500, only $500 would show up for that month's delinquency and the overall delinquency balance increases. So far so good. As the delinquency is paid up, the amount paid would be deducted from the ongoing delinquency balance and the balance would decrease.
Then I asked, what happens to the delinquency of evicted tenants. Yes, if you go after them, and recover, it will balance but if you don't recover all or if you do not expect to be able to recover so choose not to even try. What happens to the delinquency?
I was told that it just get carried forward indefinably. This does not make sense to me as you are now carrying forward an accumulating balance that has nothing to do with the current years books.
As a hypothetical, stripping out everything else;
- Annual Potential Income $250,000
- Annual Unrecoverable Delinquency @ 1% = $2,500.
- Over 10 years, the delinquency balance would grow to $25,000
Assuming you achieve and maintain 100% occupancy (don't we all wish :) in the 11th year, your income on the P & L will show only $225,000
Is this the correct way for delinquency income to be handled? I would have thought that at a certain point, it would be declared unrecoverable and simply written off.
What am I missing?
Oren