Building Your Success: How to Set Up an Effective Chart of Accounts System as a Real Estate Agent
- Allison O'Dell
- Mar 7
- 6 min read
Setting up a successful bookkeeping system is vital for real estate agents looking to thrive. An effective chart of accounts provides a clear view of your financial health, enabling better decision-making for your business. In this guide, we'll explore how to establish an efficient bookkeeping system using accrual accounting, offering actionable strategies and real-world examples.
Understanding the Chart of Accounts
Before we explore how to set up your chart of accounts, let’s clarify what this phrase means. A chart of accounts is a comprehensive list of all financial accounts (i.e., categories) within your business’s general ledger, broken into assets, liabilities, owner's capital/equity, income, and expenses.
Using a well-organized chart not only simplifies your bookkeeping but also ensures that your financial statements are accurate and timely. For example, agents who regularly monitor their charts can identify trends such as seasonal changes in income, allowing them to adjust their strategies proactively.
Why Accrual Accounting Matters
One major decision in setting up your bookkeeping practices revolves around the accounting method you choose. Cash accounting records revenue and expenses only when money changes hands. In contrast, accrual accounting captures income and expenses as they happen, regardless of cash transactions.
For real estate agents, this accounting method is particularly useful. According to the National Association of Realtors, about 30% of real estate transactions involve delayed payment. Accrual accounting provides a fuller picture of your financial dealings, which can significantly shape your business strategies. For instance, breaking down your annual fees into the number of months covered offers a more accurate picture of your monthly business expenses. Cash accounting, conversely, only shows the month you paid for the fees, misrepresenting that one month's profit or loss.
Categories for Your Chart of Accounts
Developing a successful chart of accounts involves categorizing various aspects of your business. Here are essential categories to consider:
1. Assets
Assets represent what your business owns. Common subcategories include:
Current Assets: Cash, accounts receivable, and office supplies.
Fixed Assets: Property and equipment used for business.
Understanding the value of your fixed assets can inform decisions about investments in new equipment or upgrades.
For long-term assets, such a furniture and equipment, accumulated depreciation is also an account you would record. The IRS stipulates how long you can break down the depreciation of most long-term assets.
2. Liabilities
Liabilities encompass what your business owes. It's important to separate these into:
Current Liabilities: Accounts payable and short-term debts.
Long-term Liabilities: Mortgages or loans extending beyond one year.
By keeping track of your liabilities, you can better prepare for future expenses and manage debts efficiently. Here's an example of using your Chart of Accounts (each account name is in quotation marks).
This is how it would look if you receive a commission that you will need to pay taxes on:
Commission Received: Debit Asset "Bank Account" = Credit Income "Income Account"
Taxes Payable (incurred because the commission was received, but not yet paid): Debit Expense "Tax Expense" = Credit Current Liability "Taxes Payable"
Taxes Paid: Debit Current Liability "Taxes Payable" = Credit Asset "Bank Account"
Note: If you don't maintain bookkeeping records for your business, you risk seeing the commission in your bank account, potentially spend it, and then be stuck when you have to pay your taxes. Maintaining current books prevents these issues from arising. It's important to regularly reconcile your bank account but that is only one piece of the puzzle. Your accounts, organized through the "Chart of Accounts" shows where your funds are actually allocated. Financial reports are useful to understand how the accounts come together.
3. Equity
Equity reflects your ownership interest and can include:
Owner's Capital: Your initial investment, changes (such as net income/loss), and additional contributions from personal funds.
Owner's Draw: Any funds you pull out of your business for personal use.
Retained Earnings: Profits reinvested in the business instead of being distributed.
Regularly reviewing your equity can help you understand whether your investments are yielding favorable returns.
4. Income
Income accounts track money coming into your business. Subcategories to consider include:
Commission Income: Earnings from property sales and rentals.
Referral Fees: Revenue from referring clients to other agents or services.
Other Income: If you do related side projects, such as staging for a fee.
Tracking referral fees and other income can provide insight into additional revenue streams that may require more attention or promotion.
5. Expenses
Expense accounts account for business-related costs. Key categories to include are based on IRS Schedule C if you're operating as a sole proprietor:
Commissions/Fees
Auto/Mileage Expenses
Legal/Professional Service Fees
Contract Labor/Wages
Advertising/Marketing Expenses
Assets – Depreciation
Gifts ($25 deduction limit)
Home Office Deduction
Self-Employment Tax
Business Meal Expense
Professional meetings/conferences/publications
Education/Training Expenses
Office Rent
Insurance (other than Health)
Office expenses
Self-employed Health Insurance
High expenses without corresponding income could indicate a need to adjust your business strategy to improve returns.
Best Practices for Setting Up Your Chart of Accounts
Simplify Where Possible
Simplicity is key in setting up your chart of accounts. Avoid creating excessive accounts, as this can lead to confusion and complicate bookkeeping tasks.
Use Descriptive Titles
Each account should have a clear title. Instead of vague labels like "Expenses," opt for descriptions like "Marketing Expenses" or "Office Supplies" to ensure clarity.
Regularly Review and Update
Your chart should evolve with your business. Regularly assess and update accounts to keep them relevant to your current financial landscape.
The Role of Remote Bookkeeping
In this digital age, remote bookkeeping has become an ideal solution for many independent contractors. Services can help you maintain an organized chart of accounts while saving you time and reducing overhead costs.
Outsourcing your bookkeeping allows you to concentrate on what you do best – selling real estate. For instance, using a remote service can free up up to 20 hours a month, time that could be spent nurturing client relationships instead.
Do I Need an Accountant or a Bookkeeper?
A common inquiry is whether you should hire an accountant or a bookkeeper. Here’s a quick distinction:
Accountants handle financial analysis, tax prep, and audits, providing strategic advice.
Bookkeepers focus primarily on keeping accurate records of your daily transactions.
Good advice is to employ both a bookkeeper for daily tasks and an accountant for strategic planning and annual audits.
Implementing Software Solutions
With your chart of accounts in place, explore accounting software designed for real estate agents. Various platforms offer user-friendly tracking and management features. For example, QuickBooks Online has many levels of subscriptions including a new level "QuickBooks Online Ledger" (only available through an accountant or bookkeeper) is affordable and simple enough for uncomplicated businesses.
Choosing the right software can drastically reduce time spent on bookkeeping. Agents who use automated software typically see a 30% reduction in time devoted to financial management.
Keeping Up with Regulatory Changes
The real estate industry is constantly evolving due to changes in regulations and tax laws. Staying informed about these shifts will enable you to adjust your chart of accounts as necessary.
Engaging in local real estate associations or forums can be valuable. It provides opportunities to share experiences and gain insights into effective recordkeeping practices amidst changing regulations.
The Impact of Accurate Bookkeeping on Profitability
A well-organized chart of accounts does more than keep your numbers tidy; it's a strategic tool that gives you insights into your profitability. By understanding your revenue and expense sources, you can make informed financial decisions.
For example, if marketing costs are high, but they're not converting to sales, you may need to reassess your efforts. Conversely, if a particular marketing campaign results in a 50% increase in inquiry calls, investing more in that area could further boost your sales.
Final Thoughts
Setting up an effective chart of accounts while utilizing accrual accounting is essential for real estate agents aiming for long-term success. By organizing financial accounts into clear categories such as assets, liabilities, equity, income, and expenses, and by regularly updating these accounts, you'll gain valuable insights into your business's financial performance.
Adapting your bookkeeping practices to fit your needs, considering remote bookkeeping options, and consulting with an accountant when necessary will enhance your financial management. By implementing these strategies, you’ll not only improve your financial health but also pave the way for future success.
By following the steps in this guide, you're laying a solid foundation for efficient bookkeeping. This approach enables you to focus on what you excel at – helping clients find their dream homes.
Navigating the real estate market is challenging, but mastering your bookkeeping will help you achieve your financial goals and build a rewarding career.
Comments