Real Estate and Accounting Basics

Accounting Basics

• Involves recording and reporting financial transactions, recognizing, processing, and summarizing in financial statements.
• Distinct from bookkeeping as it encompasses a broader financial perspective.
• Covers areas such as income/expenses, profits/losses, asset value changes, audits, tax management, and reporting.

Accounting Period

• Defined as the time span reported in financial statements.
• REI Hub allows customization of date range and reporting period for financial reports.

Accrual Accounting

• Records financial effects when transactions occur, rather than when cash is exchanged.
• A landlord records expenses based on invoice date, not payment date.
• REI Hub clients can choose between accrual and cash-basis accounting.

Allocating Funds

• Assigns costs or funds to various accounts, periods, properties, or units.
• Essential for real estate investors managing multiple properties to distribute expenses accurately.

Amortization

• Involves gradual reduction of debt through equal installments, affecting both principal and interest over time.
• Typically applied to mortgages and loans; REI Hub provides a Loan Payment Template for detailed breakdowns.

Appreciation

• Refers to the increase in an asset's value over time, particularly relevant in real estate.
• Home values generally exceed inflation rates in growing urban areas.

Assets

• Anything owned expecting to provide future benefits, including land, buildings, and fixtures for rental properties.
• REI Hub offers straightforward methods to add assets.

Bad Debt

• Accounts or loans considered uncollectible, such as unpaid rental income.

Balance Sheet

• A report detailing a business's assets, liabilities, and equity.
• Necessary for monitoring business health and required for tax reporting in some situations.

Basis

• Represents the capital investment amount in a property for tax purposes.
• Essential for tracking the value of new rental properties recorded on closing statements.

Bookkeeping

• The systematic recording of financial transactions and maintaining records.
• Focuses on setting up charts of accounts, invoicing, transaction recording, and account reconciliation.

Break-Even Point

• Occurs when total revenues equal total costs; critical for assessing rental property profitability.

Capital Expenditure

• Funds spent to acquire or improve capital assets, treated differently from regular expenses for tax purposes.

Cap Rate

• Rate of return on a real estate investment, calculated by dividing net operating income by current property value.

Cash Accounting

• Records revenues and expenditures based on cash transactions.
• REI Hub defaults to cash-basis accounting.

Cash Flow Statement

• Details operating, investing, and financing activities that influence cash positions, aiding financial oversight.

Cash-on-Cash Return

• Measures cash income versus cash invested in a property, assessing investment performance through REI Hub reports.

Chargeback

• Costs incurred by landlords for tenant-responsible expenses, used for expense recovery.

Chart of Accounts

• Organizational tool listing all accounts in a general ledger, typically categorized by assets, liabilities, revenue, and expenses.

Combined Financial Statement

• A financial statement compiling accounts from two or more entities.

Credit and Debit

• Credit entries indicate asset reduction or liability/revenue increase; debit entries represent asset/expense increases or liability/revenue decreases.

Depreciation

• Represents asset value reduction over time due to usage or wear; applicable to property ready for rental.

Double-Entry Bookkeeping

• Method requiring each transaction to be recorded in two or more accounts, ensuring the balance of debits and credits.

Equity

• Total assets minus total liabilities; reflected in balance and cash flow statements.

Escrow

• Funds held by a third party until contract conditions are met; involves property taxes and insurance typically.

Expense

• Funds expended for specific purposes; must meet IRS standards to be considered deductible.

Fair Market Value

• The estimated price at which a property can be exchanged; used for assessing equity in reports.

Fixed Asset

• Long-term physical assets, less likely to change; includes buildings and machinery.

Fixed and Variable Costs

• Fixed costs remain constant regardless of activity levels; variable costs fluctuate with output or consumption levels.

House Hacking

• Generating income from one's own home through renting spare rooms or parts of the property.

Journal Entry

• Recorded transactions in the general ledger, including details such as date, amount, and transaction description.

Liability

• Debts owed by one entity to another, reflected in balance sheets.

Lien

• A creditor's claim against an asset, which can affect ownership rights.

Net Income Statement (Profit & Loss)

• Summarizes total revenues and expenses over a specific period, aiding financial analysis.

Opening Balance

• The initial balance of a ledger account at the beginning of an accounting period.

Prepaid Expense

• Costs paid for goods/services to be received in the future, such as insurance premiums.

Real Estate

• Involves land and physical properties, categorized into residential and commercial sectors.

Rent Roll

• A document providing details on rents collected by unit or property.

Return on Investment (ROI)

• Evaluates the profitability of an investment by comparing invested costs with the property's current value.

Schedule E

• Used for reporting net income or loss for rental properties on personal income tax returns.

Security Deposit

• A sum paid by tenants to cover potential damages, with specific recording in REI Hub.

Tax Basis

• The original cost of an asset minus depreciation, essential for calculating tax gains or losses.

Tax Deduction

• Allows specific costs to reduce taxable income, influencing overall tax responsibilities.

W-9 Form

• IRS form for taxpayer identification needed for income reporting and other tax-related transactions.

Write Off

• Eliminating an uncollectible asset from financial records, applicable in cases of bad debt.

This quiz covers essential concepts in real estate and accounting, including IRS guidelines for rental properties, double-entry bookkeeping, equity in business, the role of escrow, and characteristics of fixed assets. Test your knowledge on these foundational topics and understand their implications in the business world.