Bookkeeping Strategies for REI - Pt 3
As true entrepreneurs, we are always looking for ways to make our Real Estate business easier while we save money. Accounting and bookkeeping is one area our ‘profits’ can easily been eaten away if we don’t have everything set up in a logistical, easy to retrieve system. So far in this series I have introduced you to setting up your paper system here, so you can get ready to enter data into QuickBooks Pro 2011
& have your bookkeeping flow smoothly.
With the help of Accountant in a Box from Dube and Associates, I have managed to set up a very easy to follow bookkeeping system that is not only within the guidelines of the Canada Revenue Agency, but also one that relieves my accountant from the evil of sorting out my paper mess (and charging me for it).
My First Bookkeeping Mistake
I think most of us stay away from bookkeeping because we are intimidated and terrified of making a mistake that costs us money. You are right in that your books must be kept up to date and organized, but it is not that hard once you understand the very basics AIAB teaches you.
I was asked why QuickBooks Pro 2011
Before you input your data, you will want to decide how to account for the transactions. This may be one of the reasons many stay away from this side of the business, but really there are two ways to do this in accounting; Accrual and Cash Basis.
Accrual basis: record your income and expenses when they actually occur regardless of whether you received or paid any funds.
Cash basis: record your income when the funds go into your bank account and record your expenses when they are paid out.
What’s the difference?
This very simple (albeit unrealistic) example will clarify the two methods:
• you have $50 of expenses for the year
• you have no other income
• your year-end is December 31
• On December 28 you sell an item to a customer for $75. The customer agrees to pay you in January, but she takes the item today.
Under the Cash basis of accounting, you record a loss for the year of $50 since you did not receive any cash during the year, but paid out $50.
Under the Accrual method you show a net income of $25 because you earned $75 during the year, but will be paid in January.
So which method is better?
Since in Canada we must report to the Canada Revenue Agency, I would lean towards the method they require you to use, which is the Accrual method even though it seems easier to use the Cash based system. The Accrual system not only keeps you in line with the CRA, but it allows you to know what your accounts receivable is outstanding at all times.
Knowing this after reading AIAB, and inputting my information using the cash based system, I am correcting this mistake. Thankfully, there is not too much data to correct! Thanks to Accountant in a Box for saving my *** before it was too late.
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