I am a nerd and I love puzzles. That's why I love handling real estate bookkeeping, because there are so many moving parts that you have to figure it out, like a puzzle. If you are a real estate agent, you know that the bookkeeping can be complicated and has stringent state regulations. Because of all of these regulations, the accounting can get technical and sometimes tedious, but it doesn't have to be if you have the right systems in place.
Organization Is Key
First of all, it is important for all real estate agencies to stay organized throughout the whole process of any given purchase and sale. Strict record-keeping rules are in the administrative code, but to get the best results, collecting the most information you can capture through the use of a succinct and standardized process will give you the edge.
Staying organized with the cash flow specifics, file numbers, and details on the transactions will allow you to utilize analytics on sales performance and provide a double-blind check for reporting accurate commissions income. In bookkeeping and reporting, the act of including the most information, recorded in a concise format, will give you the most powerful feedback.
Having a consistent file naming system for earnest money transactions in your records, and your QuickBooks file, is the first place to start. When you can easily track a transaction from start to finish just by searching your QuickBooks file for the standardized coding for that client, you've got it made. All of the sudden, not only are you able to track the flow of money from start to finish, you are also able to compile this cash flow information into useful models to analyze the efficiency of your business.
The Earnest Truth On Earnest Money
You could have an entirely detailed and clean set of records, but if you don't know how to properly account for your earnest money deposits in QuickBooks, you could be hurting yourself. A common mistake we see is the trust bank account being reconciled, with all funds accounted for down to the last penny, yet the Earnest Money Liability account is out of whack, completely overstated.
What many people don't quite understand is that there are two steps to sales transactions and they are what I call coupled transactions, because you shouldn't have one without the other. Most everyone accounts for the entry that transfers the agent's commissions from the trust account to the checking account, but not everyone makes the matching sales entry to decrease the earnest money liability and record the commissions as income.
The money sitting it your trust account isn't your money, it's your client's, but it could become income for your business. It's important to keep the liability balance accurate, as it can serve as a tool to track sales turnover and keep your income account precise. When this account is reconciled, and there is a system to track pending transactions, you can ensure that your Profit & Loss isn't understated by having your income correctly tracked and recorded.
Listen To What Your Books Are Telling You
All in all, any business should be able to look at their books and get a snapshot of their financial position, their liabilities, and where they stand. We have seen, with Real Estate firms especially, an understated profit and loss could be avoided with the right implementation of processes and methods of reconciling to not only ensure that the books are accurate, but also provide useful analytics on sales performance and turnover.
With the profit and loss accurately depicting your financial standing, you can make decisions using valuable financial information, which is really the goal for any bookkeeping system.