While real estate deals are often quite complicated, the actual accounting is comparatively easy. Let’s break it down here:-
There are two key questions that you need to ask yourself to do the accounting properly for your real estate acquisition:-
- Are you developing or flipping a property for a future sale? Or,
- Do you own the property for rental income?
If you develop real estate, the primary focus should be on the balance sheet of your financial statements. On the other hand, if you develop or own the property of rental incomes, your primary focus should be on your profit & loss account.
Just to be precise – both real estate activities will have a balance sheet and profit & loss accounts. However, the main difference lies in the focus area, which will change based on the purpose of use.
Real Estate Development Accounting
Real estate development accounting is concerned with two things – acquisition and asset, i.e., land or building development or remodelling it for future sales or rental. Developers usually use the balance sheet to keep track of their development or renovation costs. The key accounts that you should be focusing on include:-
- Accounts Payable
- Cash Accounts
- CIP (Construction in Progress) or WIP (Work in Progress) Accounts
- Deposit Receivables
- Equity Accounts
- Long term Debt
- Retainage Payable
- Short term Debt
Moreover, you can then establish the profit & loss account once the property development is complete and is either sold or ready for renting.
Balance Sheet Accounts to Focus on If you are Building and Planning to Sell
- Sales – The sale price of property or unit.
- COGS (Cost of Goods Sold) – Total construction is broken down by per square footage or actual cost.
Most developers rely strongly on a job costing accounting system. For such developers, the essential accounts will be CIP (Construction in Progress) or WIP (Work in Progress) accounts.
Hard Costs Vs. Soft Costs
To paraphrase, in real estate development accounting, hard costs include construction costs hat are associated with the actual physical construction of the property. On average, these costs add up to a total of 75-80% of the total costs. Few examples of hard costs include:-
- Hazardous Material Abatement
- Doors & Window
- Finishes (Plaster and Drywall, Flooring)
- Equipment like the trash system, loading dock equipment and conveying systems, etc.
Soft costs, on the other hand, are part of the overall development project but are not tied to the actual physical construction. These are more concerned with consultants, architects, and the planning of the project.
Fit Your Accounting Needs to Your Business
Simply put, this guide can get you started on your real estate development and acquisition accounting. But, you may need the guidance of an expert to hold the accounting structures together. So, get in touch with a professional accountant or refer to an online accounting service for fulfilling your real estate accounting needs based on the type of your business.