Podcast
Questions and Answers
Match the accounting methods with their descriptions:
Match the accounting methods with their descriptions:
Cash-basis accounting = Income is recorded when received and expenses are recorded when paid Accrual-basis accounting = Income and expenses are recorded when they are incurred Modified cash-basis accounting = Combination of cash and accrual accounting methods Financial accounting = Preparation of financial statements for external stakeholders
Match the financial terms with their definitions:
Match the financial terms with their definitions:
Net Operating Income = Total income minus operating expenses Operating Expenses = Costs incurred in managing and maintaining property Gross Income = Total income generated before expenses Cash Flow = The net amount of cash moving in and out of a business
Match the software benefits with their advantages:
Match the software benefits with their advantages:
Specialized property management software = Streamlines financial reporting Trust account management software = Ensures compliance with trust fund regulations Budgeting software = Facilitates the preparation of annual operating budgets Accounting software = Simplifies tracking and recording financial transactions
Match the tax deductions with their types:
Match the tax deductions with their types:
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Match the components of financial reports with their contents:
Match the components of financial reports with their contents:
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What is the primary focus of cash-basis accounting?
What is the primary focus of cash-basis accounting?
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Which of the following is NOT a common rule imposed on trust accounts by states?
Which of the following is NOT a common rule imposed on trust accounts by states?
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Which method is essential for increasing net operating income?
Which method is essential for increasing net operating income?
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What advantage does specialized property management accounting software provide?
What advantage does specialized property management accounting software provide?
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What is a common benefit of preparing an annual operating budget?
What is a common benefit of preparing an annual operating budget?
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Which method records expenses when incurred but income only when received?
Which method records expenses when incurred but income only when received?
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What is a key requirement for trust funds managed by property managers?
What is a key requirement for trust funds managed by property managers?
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Which of the following is not included in operating expenses?
Which of the following is not included in operating expenses?
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Which of the following best defines net operating income (NOI)?
Which of the following best defines net operating income (NOI)?
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What is the purpose of maintaining different trust accounts by property managers?
What is the purpose of maintaining different trust accounts by property managers?
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Study Notes
Accounting Methods
- Three basic accounting methods: cash-basis, accrual-basis, and modified cash-basis.
- Cash-basis: Records income when received, expenses when paid.
- Accrual-basis: Records income when due, expenses when incurred.
- Modified cash-basis: Records annual/semi-annual expenses monthly as they accrue; income only when received.
- IRS approval needed for changing accounting methods.
Property Management Accounting Software
- Specialized software handles accounting and generates financial reports.
- Reports include monthly, quarterly, and annual reports; Schedule E (tax reporting); expense categories; income/expense running totals; bank records; payroll records; inventory records; purchase orders; and maintenance records.
Trust Funds and Bank Accounts
- Trust funds: All funds managed for clients.
- Funds cannot be commingled with manager's personal funds.
- Trust accounts legally required in most jurisdictions.
- Some firms use pooled trust accounts.
- State laws dictate trust account handling (account setup, interest distribution, fee payment, deposit deadlines).
- Three main trust accounts:
- Operating account: For daily receipts/payments (rent, operating expenses).
- Reserve fund account: For capital expenditures (e.g., roof, appliances) and major repairs.
- Security deposit account: For tenant security deposits; often subject to interest laws.
- All bank accounts must be federally insured (FDIC) to $250,000 per owner/client; account name must show fiduciary capacity.
Gross Income and Operating Expenses
- Gross income: All income from the property before expenses (rent, utilities, parking, etc.).
- Operating expenses: Costs of maintaining and managing the property (excluding debt, taxes, and capital improvements).
- Operating expense ratio: (Operating expenses ÷ Gross income). Shows management efficiency – compare to industry averages.
- Fixed expenses: Recurring, independent of occupancy (property taxes, insurance).
- Variable expenses: Vary with occupancy (maintenance, utilities).
Operating Expense Categories
- Property taxes: General real estate taxes and special assessments (improvements).
- Insurance: Hazard and liability.
- Utilities: Electricity, gas, water, sewer, trash (and potentially internet/cable).
- Maintenance: Groundskeeping, repairs (ordinary repairs for operating expenses). Capital improvements are not operating expenses.
- Other expenses: Security, marketing, legal fees, administrative costs, management fees.
Net Operating Income (NOI)
- NOI: Gross income minus operating expenses.
- Measures return on investment (ROI): (NOI ÷ Capital invested).
- Useful in property valuation.
Increasing NOI
- Increase gross income: Higher rent, better occupancy, stronger collections, additional space, more miscellaneous income.
- Decrease expenses: Lower property taxes, insurance, and other operating costs.
Cash Flow
- Cash flow: NOI minus debt service.
- Cash flow used for capital expenditures, reserves, owner income.
- After-tax cash flow: Cash flow after income taxes.
Annual Operating Budget
- Annual operating budget: Detailed income/expense forecast for the year.
- Incremental budgeting: Uses prior data plus adjustments.
- Zero-based budgeting: Starts from scratch using comparable properties.
- Potential gross income (PGI): Expected income without vacancies (using contract rent for occupied units, market rent for vacant).
- Vacancy factor: Percentage reduction for vacancies and collection problems.
- Effective gross income (EGI): PGI less vacancy factor, plus miscellaneous income.
Financial Reports
- Financial reports: Monthly, quarterly, annual; summaries of actual income/expenses.
- Reports include summary of operations, rent roll, owner contributions, statement of receipts/disbursements, reserve account report, budget comparison, narrative reports.
- Used for monitoring expenses, revising budgets.
Income Taxes and Real Estate
- Tax deductions for rental property owners:
- Depreciation: Loss in value over time (cost recovery), IRS-determined period (27.5 years for residential after 1987).
- Mortgage interest & points: Fully deductible.
- Operating expenses (excluding capital improvements): Fully deductible.
- Operating losses (up to $25,000): Deductible from ordinary income if materially participating. Passive losses are generally limited to passive income.
- Income tax on sale of property: Capital gain (short-term or long-term) based on holding period.
- Gain (or loss) = Net sales price – Adjusted Basis.
- Net sales price (amount realized) = Sales price – selling expenses
- Adjusted basis = Initial basis + Capital expenditures – Depreciation
- Initial basis = Purchase price + closing costs + evaluation expenses.
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Description
Explore the three basic accounting methods: cash-basis, accrual-basis, and modified cash-basis. Understand the role of property management accounting software in generating financial reports, and learn about managing trust funds and bank accounts responsibly. This quiz covers essential concepts for both accounting practices and software applications.
