A businesses accounting method certainly impacts its investment strategy. The right accounting strategy can benefit the business greatly by helping to depict the actual financial condition of the company. Which in turn aids in making insightful business decisions with clearly-devised business strategies.
And, when it comes to multifamily property management and investors, there are two accounting options to choose from namely, cash and accrual.
Before we proceed to decide which method suits the best in terms of multifamily accounting, let us understand what these actually mean!
What is the difference between cash and accrual accounting?
Let us pit cash vs accrual accounting against each other and find out the difference.
Based on definition
In this type of accounting, inflows and outflows are recorded in the accounting books as and when cash is received and paid out respectively. The entries in this method of accounting only include transactions completed with cash.
In the accrual system, incomes and expenses are recorded as and when they arise i.e. when they accrue and not when there is real cash flow. Meaning the transactions in accrual accounting are recorded when the sale [revenue] or purchase [expense] takes place instead of recording it when the debt is resolved.
Based on the accounting system
The cash method of accounting follows the single-entry accounting system that either records the inflow of cash or the outflow of the same.
This method of accounting involved the double entry system that we are familiar with. Here, each transaction has two outcomes, one in debit and the other in credit.
Based on accuracy
Since the system of cash accounting follows the single-entry system, mistakes are bound to happen. So, the accuracy of cash accounting is lower.
As we discussed above that the accrual system of accounting follows a double-entry system. This way almost every transaction occurs twice for you to record it. This leaves less room for mistakes making accrual accounting more accurate than cash accounting.
Based on audits
Under this system, the financial statements made cannot be audited.
Only the financial statements made under an accrual system can be audited.
Based on suitability
This type of accounting is suitable for small and micro businesses.
This accounting is suitable for large corporations and medium-sized businesses.
In simple words, between cash vs accrual accounting, the cash accounting method involves the recording of cash transactions as and when they occur whereas accrual accounting involves the recording of transactions when they arise.
What is multifamily accounting?
Multifamily accounting involves a number of long-term transactions, given the nature of the business.
Best Accounting Method for Multifamily Property Investors and Managers
In light of the same, the accrual basis of accounting serves best for the inherent benefits that it has to offer according to the top multifamily property management companies.
Here are a few compelling reasons as to why accrual accounting is most preferred by multifamily property investors:
In property management accountant records, the time span between the financing of the project and incurring returns is quite long. Therefore, it is advisable that expenses and incomes are recorded at the time when they accrue.
This is because such practice helps the business gauge the financial condition of the company from a realistic perspective with respect to the profitability of the investments, development costs and associated gains, etc.
In multifamily accounting, there may be occasions where, in a certain year there may be no real cash inflow while in the subsequent year, the cash flow may be enormous on account of the previous year’s receivables. Here’s where an accrual system benefits greatly by allowing you to report incomes as and when they arise thereby helping the business regulate its tax filings.
The cash basis of accounting, on the other hand, would mean huge payments of taxes in that particular year!
Unlike accrual accounting, a cash accounting system compels you to maintain a separate ledger of inflows and outflows. Consequently, the business also has to engage manpower to deal with such accounts thereby consuming time and additional costs in the form of salaries to such employees.
However, the accrual basis bypasses such problems. Since there is no need to prepare a separate cash flow ledger, it helps you cut down time and accounts related fees to a considerable extent.
Multifamily property management companies and managers should surely opt for accrual accounting for the several benefits that it offers over the cash method of accounting.
More and more multifamily property investors are moving towards the same. Well, certainly, it simplifies business accounting and helps depict a true and fair picture of the financial soundness of your company.
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