Unit 5: Property Management Accounting – Flashcards

Any accounting system has 5 functions: 1. Record, create a systematic record of the daily financial activity of the business. 2. Classify, classify transactions and events into related groups or categories. Enables us to reduce a mass of detail into a compact and usable form. 3. Summarize, organize accounting info in accounting reports that are designed to meet the info needs of the owners. 4. Communicate, communicate the financial info to interested and authorized parties. Recording, summarizing and classifying info create accounting data and reports which must be shared with proper parties. 5. Interpret, interpret the info to add further meaning. Accounting reports must be presented in accordance with certain ground rules and assumptions so that interpretation is correct. The GAAP (generally accepted accounting principles) are accounting concepts, measurement techniques, and presentation standards used in the preparation of financial statements. Developing accounting info in conformity with GAAP is called financial accounting. An organizations accounting system involves the classification of accounts, books, forms and procedures which record and control operational results. Any accounting system must: -be simple, easy to understand and work with -be designed to provide accurate info -be timely -provide a proper audit trail of documents, includes proper filing systems for source docs and cross-referencing of entries from books of original entry to general ledger -meet the minimum regulatory requirements in the industry, including income tax requirements common to all business and specific trust requirements under the Act. -provide for records retention. Source docs should be retained for 6 years after the end of the taxation year. Journals and ledgers need to be maintained indefinitely. If the business is wound up, the books need to be maintained for an additional 2 years. After the 2 year time period, permission to destroy the records should be obtained from the CRA.

Important accounting reports as they summarize the business transactions of a specific time period. They show the financial position of the business at the time of the report and the operating results that led to that position. Basic purpose is to assist decision makers in evaluating the financial strength, profitability and future prospects of the business entity. Good records are essential in the planning process, especially in budget preparation. Having adequate records also assists in safeguarding the assets of the business and adequate records require orderly procedures in their preparation, forcing management to conduct business in an orderly fashion, important for efficiency.

Consists of several types of docs including: -Source Documents, leases, cancelled cheques, invoices from supplies. These are the originating docs that start the accounting cycle. -Books of Original entry and sub-ledgers, cash disbursements or cash receipts journal or accounts receivable ledger. Source docs are posted to these. -General Ledger, summary of active accounts of the business in numerical order. Books of entry are posted to the general ledger account. General ledger is a running tally of each balance sheet item and income statement items. The GL represents the final book of the business.

Business Entity Entity is regarded as separate from its owner, though the owner is personally liable for all debts incurred by the proprietorship. For each business entity, there should be separate accounting records. In PM, the business entity is the rental unit, the unit should not intermingle with the owner's personal affairs as the financial statements would not be accurate. Assets Economic resources owned by a business and expected to benefit future operations. Buildings, furniture, laundry equipment, machinery, merchandise, legal right like accounts receivable, investments, shares, patent rights, etc. Liabilities Debts. Liabilities arising from the purchase of goods or services on credit is called account payable and the vendor is a creditor. Owner's Equity Resources invested by the owner and equal to the total assets minus the total liabilities. Owner equity is a residual claim because claims of the creditors legally come first, the owner is entitled to whatever remains after the claims of the creditors are satisfied. Equity comes from two sources: 1.investment by owner transferring cash or other personal assets to the business entity 2. earnings from profitable operation of the business Decreases in owners equity are caused by: 1. withdrawals of cash or assets by owner 2. losses from unprofitable business operations Balance Sheet Shows financial position of business. Listing of assets and liabilities of a business and the owner's/shareholder's equity. Revenue Either receives cash payment immediately or acquires an account receivable which will be collected and then become cash. Expenses Net Income Remaining income after expense deductions are made from the revenue. Income Statement Also called a profit and loss statement, used to evaluate business performance by matching revenue earned with the expenses incurred. Statement reflects how much a business makes or loses during a given period of time and whether the business has been profitable. Accounts and Ledgers An account or ledger account is the record used to record increases and decreases in a single balance sheet or income statement. The entire group of accounts is called a ledger. Accounts are usually arranged in the ledger in the following order: assets, liabilities, owner's equity, revenue and expenses. A chart of accounts is a listing of the account titles and account numbers used by a business Journal Record of transactions, a book of original entry. Debits and Credits In accrual accounting, a double set of entries is required. For every transaction, a debit (DR) and credit (CR) accounting entry are made. Posting Totaled transactions entered in the journals are posted to individual accounts at periodic intervals (weekly, monthly, etc) Trial Balance Listing of the G/L accounts with respective balances. All accounts with debit balances are totaled separately from accounts with credit balances. Two totals should be equal. Prepared prior to financial statements as a partial check of mathematical accuracy of the posting process.

Revenue from rents, common area (CAM) recoveries, fees generated from parking, laundry, etc. Documents that form an audit trail and account for the revenue: Tenant lease, indicates rent, security deposit, CAM and lease term. Deposit Register or Trust Synoptic, registry of the deposit slips that are ID'd by property and their designated trust account. Cross-referenced with tenant ledger. Tenant Ledger, monthly rent receivables roll where each tenant is ID'd and entries are posted. Provides a summary of which tenants are in arrears and which are current. Revenue Accounts to General Ledger, all other revenue would be accounted for in the general ledger (parking, laundry, etc) Residential Security Deposits, must be registered as being deposited in a separate trust account per the RTA

Risks on revenue side of accounting process occur with: -vacancies list is over-inflated thus rents are being collected for recorded vacancies but not being recorded as income in the ledger. -incorrect rent amounts are received. Can be controlled with up-to-date leases, copies are held on-site by managers -shortages/overages in the accounting process. Can be controlled with monthly reconciliation of the trust bank account. A monthly reconciliation of the trust account is a requirement of the Real Estate Act.

Audit trail with following: -Purchase Orders -Invoices, for all expenses in accordance with management agreement. Should be coded by property and expense type, filed once paid -Cash Payment Journal, numerical reference to the cheque, the trust account, date, amount and payee. 'TRUST ACCOUNT' must be on all cheques issued from trust account. -Expense Accounts in General Ledger -Residential Security Deposit Register, SD refunds recorded and returned as regulated by RTA

Risks on expense accounting process arise from: -incorrect coding (assigning expenses to wrong building), can be controlled by monthly review of financial statements with owners -unauthorized payments (can be controlled by reviewing financial statements)

Profitability is measured by the amount of income returned to the owner.

Properties NOI is a partial measure of a PM's success in achieving highest income and lowest expenses. Increasing rents, controlling expenses and reducing vacancy and collection losses will help maximize NOI.

Gross Potential Rent Vacancy and Rent Loss (-) Miscellaneous income (+) Effective Gross Income (=) Operating Expenses (-) NOI (=) Debt Service (-) Capital Expenses (-) Cash Flow (=) GPR is based on full occupancy of all leasable space in a building at the highest market rent. GRP is a benchmark figure for the property that remains relatively constant from month to month subject to change if rental rates increase or decrease, or the number of units or amount of leasable space changes. Vacancy and Rent Loss 1. Physical, vacant unit 2. Economic, non-occupied, non-revenue generating Miscellaneous Income Any income other than scheduled rent Effective Gross Income Money available to pay expenses of the property GPR - vacancy/rent loss + misc income Operating Expenses Insurance, taxes, utilities, payroll, maintenance & repairs, painting and redecorating, landscaping, etc. Net Operating Income NOI What remains after op costs are subtracted from effective gross income. Measure of PM's success in attaining highest possible income with lowest possible expenses without sacrificing property's physical requirements. Debt Service Mortgage and interest outstanding. Not considered an operating expense because it is not paid to maintain the property. Some owners require the debt service to be paid from the property's operating account. When debt service exceeds NOI, the result is a negative cash flow. The owner will need to personally cover the operating expenses when this happens. Capital Expenditures Major amounts spent to maintain or improve the property and increase its value. Cash Flow What remains after debt service payments and reserve fund contributions are deducted from NOI. Represents part of the owner's profits from the investment. Owner is then responsible for all income taxes on the property's income.

Three main categories of files that should be kept: 1. Rental records 2. Income and Expense info 3. Financial reports Examples: rent roll, receipts journal, rent ledger, security deposits, delinquency reports, bank accounts, cheques, cash disbursements journal, purchase orders, paid invoices, unpaid invoices, receiving docs, annual income tax returns, GST forms, annual financial statements, payroll deductions, current budget, etc.

Trust money is rent money collected by a PM from a property owned by someone else. All trust provisions in the Real Estate Act and Rules apply.

A broker is required to maintain at least one account designated as a trust account in a financial institution located in AB or the city of Lloyd which they must deposit money received in trust for other persons in connection with a trade in real estate. The funds must be kept separate and apart from other money, and disbursements can only be made within the terms of the trust. Section 25 of the Act requires that every brokerage must maintain an account designated as a trust account and must be an interest-bearing trust account. Every brokerage must instruct the financial isntitution to remit the interest earned on the trust accounts, less bank service fees, to the Alberta Real Estate Foundation (AREF). The brokerage must notify RECA immediately in writing after opening or closing a trust account. When the registration of a brokerage is cancelled or suspended, the Exec Director may direct the bank to hold the balance of credit in that account and put a hold on any withdrawals. A broker can't pay any personal or office expenses out of the trust account. The minimum books and records required are: duplicate deposit books or slips, cheque books with stubs attached or duplicated cheques in an automated system, monthly bank statements with cancelled cheques, cash receipt and disbursement journal, monthly bank reconciliation Broker is responsible for ensuring that each trust account is reconciled monthly, within 30 days of the prior month's bank statement. When funds are held for more than one client, a trust liability listing must also be prepared as part of the reconciliation, the brokerage shall -identify the balances owing to each client or customer held in trust -reconcile trust liability monthly to the reconciled bank balance Brokers can only disburse trust money if authorized by the terms of the trust. May include items like utilities, appliance repairs, snow removal, condo fees, brokerage management fees, payments to owners, as long as a negative balance is not created in the owner's ledger. A pooled disbursement account may be used by a brokerage to reduce the number of cheques issued only if the following conditions are met: -only money the brokerage receives in trust in respect to a trade in real estate may pass through the account -disbursements on behalf of a client may be made only with a transfer of money held for the client in another trust account or pooled trust account to cover the disbursement -the account must be designated as a trust account

A brokerage must keep records regarding trust accounts and a trust ledger. The ledger should include a record of: -funds the brokerage receives in trust -funds the brokerage holds in trust -interest on funds held in trust -disbursements the brokerage makes from trust funds Procedures for maintaining these books are: -chronological record (daily synoptic) must be kept in which to record trust monies received and disbursed on a daily basis -each real estate transaction must be recorded separatey in a trust ledger showing from whom the money was received, to whom it was disbursed, and any unexpected balance -a monthly trial balance should be done to reconcile monies held in trust to the trust ledger -a monthly trust bank reconciliation with sufficient detail to explain any variance between the trust ledger trial balance and the trust accounts -every deposit slip and cancelled cheque must be identified with a cross-reference to the transaction in the trust ledger and record of original entry -all duplicate deposit slips, cancelled cheques and bank statements for all trust accounts (for PM, a record of transfer and debit memos also) -records respecting trust accounts established per section 25 of the Act and a trust ledger in which the branch shall maintain a separate record of trust funds received on behalf of each person -Section 94 of the Rules states that every brokerage shall keep proper records at its main office with respect to all its trades in real estate including trust account -records and trust monies received in connect with real estate trades outside of AB must be kept separate -brokerage records are to be retained for at least 3 years A brokerage is required to to complete and submit a report to RECA within 3 months of its fiscal year end regarding the operation of its trust accounts.

If a trust deposit or amount of trust money cannot be disbursed from the trust account for any reason including: -broker/PM sent a trust cheque to the person entitled to the money but the person did not deposit it -the person entitled to the money can't be located Section 25 of the Act applies as long as the following conditions take place: -trust funds have been held in trust for more than 2 years from when the depositor became entitled to them -the industry member must have made reasonable efforts to locate the person for whom the trust funds are held When these conditions are met, the funds must be paid to AREF.

Capital Budget - standard or guide against which expenses for major repairs or renos can be measured and controlled Operating Budget - standard against which revenue and operating expenses are measured. An itemized estimate of income and expenses for a given period of time in the future.

Serves two purposes: 1. provides essential control over expenses 2. provides landlord with an estimate of anticipated net income the building may earn to compare with financial objectives Operating budgets include revenue and expenses. For commercial and industrial, revenue will include base rent, any rental escalation, as well as any percentage rent due under the lease. Also includes recoveries of op costs, CAM, property taxes. Revenue Forecasting Provisions must be made for potential losses from collections, vacancy and turnover (time to make ready). Effective Revenue Calculation: GPR - Vacancy Loss - Collection Loss - Turnover Loss = Adjusted rent + misc revenue = EFFECTIVE REVENUE Expenses that are initially incurred by landlord but are charged back to the tenant are called recoverable expenses. GST must be added to all commercial, retail and industrial rents. Residential rents are exempt from GST. Commercial property taxes, employee salaries and licences are non-GST applicable op costs. Its common practice to separate op costs into GST applicable and non-GST applicable operating expenses. Property taxes are usually shown separately from other expenses to accommodate leases that treat property taxes as a separate expense prorated in proportion to the space occupied or charged proportionately over a base year.

Allocated funds for renovation, modernization, conversion and redevelopment projects. Factors to consider when preparing a capital budget: -estimated capital cost including contractor, trades people, architects and consultants -amount and cost of required financing -loss of revenue during the period when work is being performed -life expectancy of building after work is completed -estimated gross rental income that will be generated on completion of the work -amount of increase in the assessed value of the building after completion of the work and tax implications -estimated market value of the building upon completion of the work

Should be submitted to the landlord monthly and should provide the owner with a clear picture of the performance of the building in comparison with the operating budget. Should identify building, and reported month, record actual revenue and expenses against budgeted amount, indicating any positive or negative variance. Current Month columns identify the amount actually received or spent, budgeted amount to be received or spent and the excess or deficiency for the month. The YTD columns show the cumulative actual and budgeted amounts and the variances for that period. The total annual budget should be the final column and should provide an overview of the total annual estimated expenses and revenue. The last line shows the revenue less expenses. Supporting data and documentation should be provided with monthly operating statements including a tenant arrears report (30, 60, 90) and rent roll.

Should include: -tenant name -lease term -lease commencement date -lease termination date -annual rental -monthly rental -rental escalation dates -amount of escalation -percentage rent -amount of rental deposit -base year -other charges (property taxes, operating expenses, common area maintenance)

Collections - Income Side All monies collected should be recorded quickly and accurately. Written receipts should be issued for all income collected and all refundable deposits. Adjustment Escalations - Non-residential Tenants make monthly contributions based on the estimated proportionate shares of these expenses, along with their rent payments. Before the end of each year, the PM should complete the budget estimates for common area maintenance expenses, op costs, property taxes and notify each tenant of their proportionate share for the upcoming year. Adjustments are made at year-end when all expenses have been finalized. If the estimates exceeded the actuals, each tenant is credited with a proportionate amount. If the actuals exceed the estimates, the tenants are billed for the difference. Form letters should be used to advise tenants of the changes where appropriate calculations should be shown and the effective date given.

Purchase orders are an advisable control. A PO is effectively a contract at the price quoted and cannot be changed unless buyer and supplier agree. PO's provide budget control and inventory control. Before ordering, check the budget category to ensure funds are available to pay for the goods once received. Enter the goods on an inventory control sheet which includes the requirement to sign-out inventory items as well. Reorder timing can be easily determined by checking the inventory balance. A PO creates a record of how many and how often an item is ordered and helps monitor adequate inventory levels. Overstocking ties up cash for other expenses and inadequate inventory increases expenses for rush orders or single unit purchases. Make policy that requires all suppliers quote the purchase order number on the invoice. Invoices should be matched with a copy of the PO and the person signing the cheque shouldn't be the same person who initiated the PO. Exceptions to PO requirements include emergency maintenance. In summary: -use sequentially numbered PO's -require all suppliers to quote the PO on invoices -pay only the amount shown on the PO -require time sheets to support the # of hours claimed for contracts based on usage

Make payments from invoices and not account statements. Paid bills and cheque stubs are used to record payments in the disbursements journal or ledger. The cheque number, date paid, amount, recipient, item serviced/purchased and any account code and PO should be noted in the cheque register. Petty cash is the exception to the payment rules. Only a small, but practical amount of cash can be available in a management office. Use a cumulative petty cash log to record the payment amounts, person receiving funds, purpose of the payment and account code. Standard payroll reporting forms must be submitted along with a cheque covering all contributions and income tax.

Formulas for balance sheet checking 1. Assets = Liabilities + Capital 2. Capital = Beginning Balance + Net Income - Owner's Draws 3. Net Income = Income - Expenses If all list totals match those on the balance sheet, the net income is correct. To verify the net income figure, obtain the following: -copies of the two bank statements (operating account, security deposit account) -list of rent receivable -list of prepaid expenses -list of accounts payable -list of security deposits held -list of owner's withdrawals

Check income statement for reasonableness. Three simple reviews: 1. Compare results to known standards. Compare income to rent roll, can variances be explained by vacancy, bad debt, arrears? Compare expenses to budget, sharp variances should be explained in the budget variance report. 2. Potential Gross Income. Unit numbers or sq ft doesn't change so potential income should be predictable. Comparing the current months Gross Potential and Effective Gross income to several months' pas figures can reveal problems such as potential income varying too often. 3. Percentages. Percentages, such as vacancy, should stay relatively constant month to month. The current vacancy percent should be close to the previous month's ratio. The ratio of payroll taxes and benefits to salaries paid should be relatively constant. Your management fee as a percentage of income should be the same from month to month and the delinquency as a percentage of income should also not fluctuate much. If a problem is suspected, check the general ledger listing all transactions for each income and expense category.

Audit Independent examination of accounting records and other evidence relating to a business to support the expression of an impartial expert opinion about the fairness and reliability of the financial statements. An auditor's report is issued and accompanies the financial statements of a business once the audit is complete.The auditor certificate says the auditing steps taken met approved standards of auditing practice and financial statements were prepared in conformity with GAAP. Audited statements can be prepared by Chartered Accountants, Certified General Accountants or Certified Management Accountants.

Purpose of control is to prevent fraud, have accurate records, safeguard company assets and to promote efficiency. The following control devices should be employed to accomplish the above: Efficient Staff, make fewer mistakes Auditors, Act requires an independent review of all trust accounts Pre-numbered Forms, easier to account for Approvals, PM should approve all bills and cheques issued Signatures, more than 1 for cheque signing Bank Reconciliation, monthly account rec's should occur Supporting Evidence, invoices or vouchers Trial Balance, prepared on a monthly basis Financial Statements, income statements should be reviewed in conjunction with budget and variances reported Security, important docs should be kept in a fireproof safe Petty cash, reviewed by manager on a periodic basis