Chart of Accounts: Designing it Right for Commercial Real Estate

 A successful commercial real estate business runs on good data. This means having a strong system in place to collect, analyze, and report on all of your business activities. For finances, the basis of this system is the chart of accounts.

What is a Chart of Accounts?

A chart of accounts is a complete record of a business’s financial information. It organizes transactions, assets, debt, and more to create a detailed picture of financial performance and is a key document for future planning. With careful numbering and placement, each account in the chart is easy to find. It is often the first go-to document when you need data for taxes, budgeting, or even have questions about business performance.

Why is a Chart of Accounts Important in Commercial Real Estate?

A chart of accounts is especially crucial in commercial real estate. When organized well, your chart of accounts can help you see financial trends across your portfolio and for specific properties. By separating financial data into different categories, it’s easier to spot the source of any problems.

 Additionally, a current, complete chart of accounts is an excellent starting point for creating a strong budget, finding information for audits and taxes, ensuring compliance with regulations, and even handling common area maintenance (CAM) reconciliation. Since your data is all in one place and clearly organized, you’ll spend less time on these major accounting tasks and risk fewer errors. Additionally, using a standard chart of accounts across all your commercial real estate companies will make it easier for anyone to assist with financial upkeep.

How to Organize Your Chart of Accounts

Usually, a chart of accounts is separated into five main categories:

1. Assets: including your properties, bank accounts, and anything else your business owns.
2. Liabilities: this category includes your loans, mortgages, and accounts payable.
3. Equity: refers to owner contributions and distributions.
4. Revenues: this is your income from all sources, including rent, fees, and CAM charges.
5. Expenses: all costs, such as utilities, maintenance, and taxes. As a commercial real estate owner, you will want to note which expenses are reimbursable and which are not to make CAM reconciliation easier at the end of the year.

 Within these categories, you can break your transactions down into more specific entries. For example, within expenses, you might have a category for all maintenance costs. You can even separate these out further, creating entries for cleaning, landscaping, painting, or other maintenance needs. However, it’s smart to find a balance between detail and readability. Too many nested accounts and sub-accounts become difficult to navigate.

 There is no single standard way to structure your chart of accounts, but most businesses use a numbering system. For example, each of the five main categories could receive a ten thousand (so assets are 10,000, liabilities are 20,000, and so on), and sub-categories are numbered within those ten thousands. For example, if the 40,000s are revenues, 41,000 might be rent income, while 42,000 might be income from other fees like parking. Numbering makes it easy to find the exact record you need quickly.

Understanding Reimbursable and Non-Reimbursable Expenses

Knowing the difference between reimbursable and non-reimbursable expenses is key for a useful, accurate chart of accounts. Separating these expenses is especially important for CAM reconciliation, since that process is based on reimbursable expenses, or expenses that the landlord can pass along to the tenant. While these may vary slightly depending on lease agreement, reimbursable expenses often include costs like:

• Routine maintenance and repairs
• Utilities
• Insurance fees
• Property taxes

On the other hand, non-reimbursable expenses are costs that the owner must handle directly. Most often, these include property renovations and upgrades. Expenses like maintenance can also be capped at a certain amount, meaning that any further costs in that category become non-reimbursable.

Using Classes in Your Chart of Accounts

Instead of adding multiple layers of sub-accounts to your chart, try using classes when you need a little extra specificity. Classes allow you to organize data within your chart of accounts. This feature allows you to keep a high level of detail without sacrificing the clarity of your chart.

 In commercial real estate, you may want to assign classes for different properties or units. This way, you can track finances by property within your chart of accounts without making the whole chart too long to manage. You can even compare classes side-by-side and run reports on individual classes for a closer look at each property’s performance. Remember to organize classes consistently across your chart of accounts to avoid confusion later on.

Commercial Real Estate Chart of Accounts in QuickBooks

It’s important to understand how to use your chart of accounts in QuickBooks for the easiest use of all your financial information. QuickBooks does offer a basic chart of accounts template, but it is not designed to accommodate commercial real estate needs.

 Instead, it’s a good idea to build your own or use a commercial real estate-focused template and upload it into your QuickBooks account to streamline your workflows. Having a chart of accounts that works for your unique business from the start will help you avoid annoying, time-consuming reorganizations and searches for data in the long run.

 Depending on the size of your business and the complexity of your entity structure, it may be difficult to set up your chart of accounts and QuickBooks accounts so that you can see the big picture of your financial data. Programs like STRATAFOLIO that specialize in commercial real estate property management can help you unify your QuickBooks data and create a chart of accounts that suits your needs. Download this sample chart of accounts to get started.

For more details about using STRATAFOLIO with QuickBooks, see the Intuit QuickBooks App Store landing page for STRATAFOLIO.

Disclosures:

Feature content (including feature graphics) adapted from an article submission by Jeri Frank. This adapted Insightful Accountant content is provided for informational and educational purposes.

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