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. Which in turn aids in making insightful business decisions with clearly-devised business strategies.
When it comes to multifamily property 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!
In this type of accounting, inflows and outflows are recorded in the accounting books as and when cash is received and paid out respectively.
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.
Best Accounting Method for Multifamily Property Investors and Managers
Multifamily accounting involves a number of long-term transactions, given the nature of the business. In light of the same, the accrual basis of accounting serves best for the inherent benefits that it has to offer.
Here are a few compelling reasons as to why accrual accounting is most preferred by multifamily property investors:
1. Accurate Financial Picture
In real-estate transactions, 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.
2. Tax Concerns
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!
3. Cost and Time Involved
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 investors and managers should surely opt for accrual accounting for the several benefits that it offers. 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.