If there’s one thing I totally love, it’s real estate accounting examples.
So I thought I’d share a real estate accounting example with you so you choose the right accounting method.
Here’s what you need to know:
There are TWO accounting methods – the Accrual method and the Cash Basis method.
BOTH determine WHEN you account for your transactions, and here are the differences:
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.
Real Estate Accounting Examples:
This is a very simple (albeit unrealistic) example:
- You have $50 expenses for the year
- You have no other income
- Your year-end is December 31
- On December 28 you sell an item for $75. The customer agrees to pay you in January but 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 you 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.
Which method is better?
Clearly, the cash basis is much easier to use.
Unfortunately, the Canada Revenue Agency requires you to use the accrual method (except in very limited cases).
That’s IMPORTANT to know.
Accountant-in-a-Box system suggests you use the accrual method because it ensures that you can easily determine how much accounts receivable is outstanding at all times, and you cover your bets with the CRA at the same time.
Believe me, you don’t want to be playing “poker” with the CRA.
So there ya have it – both accounting methods explained – hope it helps!!!
Have any questions? Let me know below and I’ll do my best to answer for you~