5 Best Practices for Working with a Chart of Accounts

Planning is essential when structuring a chart of accounts so that it not only keeps with generally accepted accounting principles but also allows the company to have the flexibility needed to track and maintain the ledger transactions for entities in the portfolio. Tracking these accounts on solid property management software systems can help increase reliability and accessibility of accounting information. When setting up a chart or charts of accounts, consider the following best practices.

1. Segregate the standard groupings of Assets, Liabilities, Equity, Income, and Expense into distinct groups. These groupings are the backbone of the chart.
2. Start with a high-level outline of the categories that are needed for the business, then get more detailed:

• Under Income, Rental Income may need to be in place. Under Rental Income, does the business need to include Base Rents, Section 8, Escalations, Utilities, Sundries, etc.?

3. Leave room for new possibilities. Using major and minor accounts allows for the build out of the chart outline. The idea is that anyone who needs to add an account at a later date should be able to look at the outline, figure out exactly where it belongs, and still have room to grow within the chart.
4. As much as possible, group and sort accounts in the order in which they should appear on most standard reports. This makes it easier to prepare financial forms and group accounts when customizing reports.

• Does the business need separate expense sections for Property Operations, Owner Expenses, Administrative Expenses, etc.?

5. Consider the types of questions the business has received in the past regarding financial activity. In the long run, it is easier to have people think of separating account activity out through the chart when it is being built, rather than having general accounts that require someone to audit when a question arises (i.e., what is my vacancy loss, what is my straight-line rent adjustment). If the business does not need that level of detail in an income statement, utilize financial reporting that consolidates those transactions together. It is better than the alternative of spending hours trying to audit an account to come up with a deeper level of detail.

These best practices are essential regardless of industry. But how does this impact a business in the Commercial or Residential markets?

Commercial Clients

CM Clients should consider recoveries when developing a chart of accounts. It is worth a discussion to look at expense pools and to make sure that the chart of accounts is detailed enough to handle the expense classifications that can be used to separate different kinds of expenses found in the expense pools. For example, if the CM portfolio has different types of electricity that some tenants include in pools but other tenants exclude in pools, it makes sense to have different electricity accounts so that coding can be done each month rather than separating them at reconciliation time. This includes differentiating between prior year and current year recovery income/reimbursements.

Multifamily Clients

Multifamily clients should consider the tracking of employee rent/concessions, resident concessions, and prior/current month vacancy accounts. Differentiating between these accounts not only provides for greater reporting capability at the properties but offers insight to owners and property managers. Compare prior year vacancies with the total number of resident concessions against current year totals. Are the concessions assisting with vacancy reduction or could the monies be used for other initiatives?

Whether working with one or several charts, understanding some best practices will enable accounting personnel and the business to achieve the robust reporting that is needed!