A property’s cash flow report is only as reliable as the transactions behind it. General ledger (GL) accounts sort money coming in and going out into categories, such as rent income, electricity, water, cable, supplies, and flooring materials.
Most property management software comes with standard GL accounts. Those accounts still need to be set up and used correctly for the property and the way it operates. For example, if residents are responsible for reimbursing the owner for utilities, the accounting system should have an appropriate utility reimbursement income account.
A $100 utility example
Let’s say 123 Main Street earns $1,000 per month in rent. The electric company sends the owner a $100 bill.
The manager enters the bill under Electricity Expense:
- Rent income: $1,000
- Electricity expense: –$100
- Amount remaining in this example: $900
Now let’s say Sally Jones is responsible for putting the electric service in her own name, but she forgets. The owner pays the $100 bill and charges Sally for the amount.
If that $100 charge is mistakenly coded to Electricity Expense instead of a reimbursement income account, the report may show:
- Rent income: $1,000
- Electricity expense: –$200
- Amount remaining in this example: $800
The property has now been charged twice in the expense category: once for the electric company’s bill and once for Sally’s charge. The owner’s report makes the property look $100 less profitable than it should.
When Sally pays, her payment should be recorded to the proper utility reimbursement income account. With the correct coding, the report reflects:
- Rent income: $1,000
- Utility reimbursement income: $100
- Electricity expense: –$100
- Amount remaining in this example: $1,000
The $100 utility cost has been recovered. Before considering other property expenses, the result is back to the $1,000 in rent income.
What incorrect coding can affect
Misclassified transactions can make expenses look higher, income look lower, and cash flow appear weaker than it really is. That can affect owner statements, decisions about distributions, budgets, and comparisons between properties. If distributions are based on inaccurate reports, an owner may receive less than expected—or be asked to contribute money to cover expenses that were misclassified.
A coding error does not automatically mean anyone acted dishonestly. It can happen because the chart of accounts was not tailored to the property, the software was configured incorrectly, or staff did not receive enough training. But repeated errors should be investigated and corrected. Owners should be able to see how charges, reimbursements, and payments are classified and ask for corrections when the reports do not make sense.
Proper GL accounts and consistent coding help show what the property actually earned, what it actually spent, and what cash is available. A cash flow report is a management tool; if the transactions are coded incorrectly, the report can give the owner the wrong picture.
When each LLC has its own bank account, it can also be easier to follow that property’s cash and see whether funds remain available after expenses are paid. That brings me to my next blog: the pros of separate bank accounts in property management.