How To Start A Property Management Company: Everything You Need to Know

ByVladana Donevski
March 07,2022
facebook icon twitter icon linkedin icon

Property management is an excellent business niche for more than one reason. The requirements for starting and succeeding in this industry are not high, and one doesn’t need a sizable up-front investment or years of experience in the field. However, as is the case with any business endeavor, there are several things one should consider and do to ensure success.

So, if you are wondering how to start a property management company properly, let’s get right on it. Below, we’ll cover everything you need to know about starting such a business - from what property management is to how to draft a business plan - so that you can confidently make this your career path.

What is Property Management?

Property management involves managing and overseeing one or more properties. It could be any kind of housing: residential, student, commercial, or community association. Most of the time, the duties coincide with those of the landlord or the property owner. However, not everyone has the time, experience, or will to handle the tasks themselves.

Some of the responsibilities property management companies can take off landlords’ plates are marketing rental units, hosting an open house, or simply showing the property to prospective tenants and collecting their applications. Screening new tenants and getting the paperwork set up for the selected ones is another service these companies can provide. Once a tenant moves in, the property manager is the one responsible for collecting rent, handling maintenance, and inspections.

If you are up for it, let’s talk about how to start a property management company in more detail. Here is a step-by-step guide you should follow to ensure your business gets off the ground.

The first step is establishing the legal structure of your business. Typically, these firms are founded as limited liability companies (LLC). Occasionally, they can also be registered as incorporated businesses (Inc.).

You can accomplish this task online yourself or hire a respectable LLC service company to handle it for you. If you can fit it into your budget, going with a service provider is the better choice because it will save you a lot of time. 

Step 2: Business Plan

This is probably the most daunting task you’ll encounter on your way to a successful property management business. However, drafting a business plan early on will help reach your company’s goals as it will keep you focused and make you take a systematic approach to what needs to be done to get everything up and running. 

You’ll want to ask yourself some critical questions as you embark on this journey. For instance, what kind of services will you provide to your clients? Should you focus on a specific type of property? How should you handle maintenance? Once you get these answered, you’ll have a clearer picture of what you need to do to have a successful property management company. 

If you are worried about what should be included in a formal business plan, Small Business Administration (SBA) lists the following sections as must-haves:

  1. Executive summary
  2. Company description
  3. Market analysis
  4. Organization and management
  5. Service or product outline
  6. Marketing and sales
  7. Funding request
  8. Financial projections
  9. Appendix 

You should consider reading up on all the SBA’s business plan guidelines if you are writing such a document for the first time. Alternatively, you can hire someone to write it for you. 

Step 3: Employees

When starting a property management company, you’ll likely be your only employee until you begin getting paid for your services. Once the business starts bringing in money, you’ll be able to hire someone to help you out with the workload. As you might not be able to afford a big team, at least not at first, you should think about what fields of expertise your company would benefit the most from. Also, it could be cost-effective to have external service providers handle certain operations for you.

Hiring an accountant or subscribing to a good accounting and bookkeeping online service is something every “How to start a property management company” guide should advise you to do. A good accountant is a must for every business, regardless of how small it may be. You’ll also need legal services as you’ll want to make sure your company’s operations comply with the law. That’s why having a real estate lawyer in your ranks or signing up for online legal services should be another priority.

Once you have the essential services pinned down, you should go back to your business plan and determine whether you need more employees and whether you need them to work full-time, part-time, or per contract. Don’t worry; by the time you have a big enough budget to start hiring people for your property management firm, you’ll know which aspects of the job require a full-time commitment and which need attention only once in a while.

Once your business starts expanding, you can hire additional property managers, payroll and accounts payable clerks, showing, move-out, and service coordinators, and leasing agents. If you plan to advertise your services online, you should consider finding reliable marketing experts and IT professionals. 

Step 4: Technology

Speaking of IT, you should keep in mind that there are plenty of programs - some of them even free - that could handle certain tasks for you. Therefore, it would be wise to dedicate some time to exploring property management software solutions, as these could take a lot off your plate and help you provide better property management services. The best ones will allow you to manage your business with just a couple of clicks.

Many other solutions will prove invaluable when you can’t yet afford an entire team. If you don’t have a lot of paperwork to handle, you can take advantage of free accounting software, for example. Once you start hiring people, you should consider payroll software, too. 

Finally, it would be best if you also went for one of the marketing tools available online. Putting up your business’ website yourself with the help of a good website builder can save you a lot of money, which can then be used for paying for the services you can’t handle on your own.

Step 5: Pricing Structure

Determining the prices of services your property management company will provide can take some time, as you need to work many details into the calculation. You need to earn enough money to keep your business not just afloat but growing further.

First, you should consider your competition’s pricing plans and use them as a point of reference. When you’re just starting, your prices need to be competitive. On the other hand, you need to earn enough to cover the expenses of running your business. 

So, to determine the pricing structure when setting up a property management company, your first step should be to go undercover and give the competition in the neighborhood a call to get informed about their price ranges. Once you estimate the standard prices in your area, you will get a better idea of how much you should charge for your services.

Keep in mind that whatever you calculate in, you must not forget that you should never compromise the quality of your services. Your good reputation is your main selling point, as this business is all about trust and relationships. So, even if you have to charge a bit more to provide a better service, don’t hesitate to do it, as this is the key to professional property management.

To help you format the pricing structure, we’ve laid out some of the most common fees property management businesses charge their clients.

Setup Fee  

This is a typical fee most service providers include, and this niche is no different. You would apply the setup fee when you sign up a new client, and the amount usually goes up to $300. 

Leasing Fee

Another one-time payment, a leasing fee is something you should charge for getting a vacant property leased. Most companies charge the equivalent of one month’s rent or at least half of it, and the amount should be clearly stated in the property management agreement. This fee covers numerous services provided, starting from listing a vacant property to you using one of the tenant screening services to find the right person to move in.

Lease Renewal Fee 

You should consider adding this optional fee to your pricing structure, as it covers renewing the lease with an existing tenant. It is typically up to $200.

Eviction Fee 

Another optional but strongly recommended fee you should consider adding to the list is the eviction fee since you can be called on as an official representative if an eviction process involving the property owner is set in motion.

Ongoing Management Fee 

This fee is the one that will keep your business in property management growing. It’s essential to include it in your pricing plan as it will cover all the daily operations, from collecting rent and conducting inspections to handling repair or maintenance requests. A set percentage of the monthly rental income is used to calculate this fee, going anywhere between 3% and 10% - the actual rate typically depends on the local market. 

Step 6: Marketing Strategy

Once you get the basics down, you need clients. Figuring out your marketing strategy is not going to be easy, but it is one of your business’ aspects not to be disregarded. 

For example, as we’ve mentioned before, you’ll need to set up an online presence and start advertising. After all, if someone is looking for property management firms, they will most likely do it online.

Also, your website will be where your commercials and marketing efforts will lead to, and having a good one will add immensely to your credibility. If you’re on a tight budget, you should think about making it yourself. There are many great website builders available online. You might need to roll up your sleeves a bit, but considering how expensive some companies providing these services are, it is certainly worth the effort.

Still, if you want to ensure your website is done professionally and you have enough funds, hiring someone to create one that will be not only pretty but also useful is a good path, which many entrepreneurs in the property management industry take. Of course, your site’s primary purpose will be attracting new customers and allowing them to get in touch with you quickly.

 You’ll also want to have someone create and implement an online marketing strategy, manage social media campaigns, and use all other available promotional tools to increase your online visibility and reach as many landlords and owners as possible. 

Step 7: Networking

While online marketing is a must, don’t forget that networking is the easiest way to gain new clients and sign them up for your services. If you are running a commercial property management business, you should pay a visit to your local business organizations. Establishing good relationships in such places will undoubtedly lead to your services getting heard of and recommended to a number of prospective clients. Also,  It would help if you got in touch with local real estate clubs and contractors.

With every new customer, your business will prosper. That is why it is fundamental never to stop networking, thus finding new clients and properties, but also ways to provide better service and keep your old clients satisfied.

Further Reading

The Costs of Starting a Property Management Company

Starting a business in this field is not an expensive endeavor, as it usually takes between $2,000 and $10,000.

While it might sound like a nuisance, it is crucial to keep track of every expense you make from day one. By doing so, you will be able to set financial goals and stay out of trouble. 

The most common expenses you will incur as you build your company are administrative ones, including salaries and benefits (along with payroll taxes), office supplies, and various services such as advertising or legal counsel. The price of any software you might use to help you get started is not to be forgotten either.

Getting a Property Management License

In the US, whether you need such a license usually varies from state to state. Most of them won’t require you to get a license or any other advanced degree. However, getting a real estate or property management certification will undoubtedly prove useful on your way to success. 

Many US programs offer courses for licensed agents to get property management certification. Although these are by no means mandatory, completing some of them is also bound to help you learn the ropes of the business.

FAQ
How do I start a property management business?

The answer to this question is a pretty straightforward one and doesn’t differ much from those to be followed when starting any other type of business. You would legally establish the company, make a sound business plan, create a competitive yet profitable pricing structure, and hire the necessary employees (or sign up for online services that would help you with the workload). Then, you’d start acquiring properties and developing a marketing strategy to help get your foot in the door and attract clients.

How much does it cost to start a property management company?

Starting this type of company is affordable as it usually costs between $2,000 and $10,000. Still, it would be best to have some extra money set aside in advance for the expenses you will incur once the business starts growing. To cut down on costs a bit, you can leave some of the work to external service providers or even get yourself a virtual assistant. Also, you can handle some tasks on your own, at least until your company starts generating enough revenue for you to start hiring people.

Why do property management companies fail?

The main reason these companies fail is due to their owners’ inexperience or reluctance to introduce certain innovations into their company’s daily operations. For example, some property managers refuse to embrace technology and use affordable online services to save some money. Most of them end up hiring more people than they need or can afford to pay. Other unsuccessful entrepreneurs in this industry often bite off more than they can chew, taking on too many tasks while having insufficient resources. Those who don’t know how to start a property management company properly are also usually those who haven’t learned how the market works, charging too low for their services but overpaying for the maintenance.

More From Our Blog

Knowledge Base
What Is a Sublet, and Should You Be Subletting Your Place?
Whether you’re temporarily relocating because of a dream job or going on a summer holiday, subletting is a great way to make back some of your rent money. So what is a sublet arrangement, and what exactly does it involve?  Unfortunately, not everyone has the right to sublet their apartment. Before renting the property to another party, make sure you aren’t breaching the terms of your lease. These agreements are legally binding, and breaking a lease can get you evicted or have other serious consequences.  To find out more about the potential pitfalls and what it takes to be a short-term landlord, check out the following guide.   What Is Subletting?   Also known as a sublease, subletting is when a tenant rents out either all or part of the property to a third party before the original lease ends. So what does a sublease mean for cash-strapped renters? In short, it can be a beneficial arrangement for those looking to redeem some of their rent money. Renters can make back up to 80% of the cash they are spending on the lease.      Although there are leases that don’t permit subletting, most simply require you to notify the landlord and get approval for any changes. If the original lease agreement makes no mention of subletting, it’s usually permitted, but it’s always better to get your landlord’s permission in writing.  The best way to shield yourself from any legal entanglements is to ink a sublease agreement with both the subletter and the landlord. This is especially useful if the tenant’s contractual obligations under the original lease agreement include covering the costs of any damage to the property. Additionally, an in-depth background check of potential subletters is a good way to root out those who have a history of not paying their bills or people on sex-crime registries.  How to Sublet an Apartment? If you decide that subletting your apartment is the way to go, there are a few other things to consider. Subletting can be an excellent solution, as long as you are well-informed about the entire process and don't rush into things. Here is a complete checklist you need to cover before entrusting your place to someone else. 1. Re-check your lease agreement The first step is reviewing your existing lease. You need to make sure you are allowed to sublet the property and under which terms. Keep in mind that individual states have their own laws when it comes to subletting.  Any constraints on subletting the apartment should be outlined in your original lease agreement. That’s why it’s absolutely essential that you read it thoroughly before embarking on this journey. And even if your local municipality permits subletting, your landlord may have his own reasons for prohibiting the practice. In such instances, it’s probably best to explore alternative options. 2. Call Your Renter Insurance Company Before subletting, check whether your renter's insurance extends to subtenants. Some insurers do cover sublease apartments, in addition to providing standard coverage for your belongings in case of theft. If yours doesn't, and you can't sign up with those that do, then it’s probably a good idea to remove your personal belongings from the apartment you're subletting. Keep in mind that you are the one who paid the security deposit. In other words, the money from your pocket is covering any damage to the property unless you get adequate insurance.  3. Market the Apartment Next, it’s time to start looking for a subletter. That typically involves posting an ad somewhere. Make sure that your quest to sublet an apartment goes through legal websites. You can also share your ad on social media platforms.  A good approach is to have all the relevant information in your ad, including the rent, list of amenities, and any other relevant details about your apartment. High-quality images of the property can also be very helpful in attracting the right candidates. You should also make sure to avoid any typos, grammar errors, and incorrect information if you want to attract serious subtenants; everything should look professional.  4. Schedule an Open House/Interviews With Prospective Subletters While trying to figure out how to sublease an apartment, most tenants will immediately start weighing the risks. To avoid any horror stories, get to know the prospective candidates by setting up an open house and following the same procedure you went through when you were looking for a place to call home. When planning an open house, it’s essential to get the timing right and make the interior of your property look pleasant.  Aside from screening potential tenants online, this is a great way to get a sense of whether someone is affable. Remember that these were some of the same hurdles you had to go through when you were renting, and by definition, subletting transforms you from a tenant to a short-term landlord.   That said, landlords are increasingly reliant on social media profiles when determining whether their applicants have suitable lifestyles for the property being rented. With the help of social media, you’ll quickly be able to determine if the subletter owns a pet or likes hosting loud parties. These sorts of details will help you choose one candidate over another. The last step is to check any references on the applications. While this may seem like a waste of time as it’s unlikely anyone would list previous landlords with whom they had an unsatisfactory experience, you should do it anyway before you sublet an apartment. Ask a few questions and keep your ears open; if there were any disagreements between the two parties, you may be able to pick up on it during the conversation. 5. Sign the Needed Agreements When you find the right subletter, it’s essential to cover yourself with a written agreement. You can find a sublease template for sublet agreements online, and you can further customize them to fit your own arrangement.  It’s also a good idea to ask your landlord for help on what should be in agreement. They can help you with suggestions on what to add or omit in the contract. Ultimately, once all parties involved sign the sublet agreement and you've received your first payment, you have officially sublet your apartment.  The Pros and Cons of Subletting The most obvious advantage of subletting is the money. If you’re renting a property that you aren’t living in, you’re pouring cash into an empty apartment. Subletting enables you to fill that financial gap. This is especially helpful if you’re temporarily relocating for work or taking an extended vacation while your lease remains intact. In these situations, sublease, by definition, allows you to retain your original lease.  Of course, a lot hangs on finding the right tenant. While tenant screening services can help, finding a trustworthy and reliable individual can be challenging. If you choose the wrong tenant, bearing the brunt of potential theft and serious property damage.  Subletting Alternatives  Subletting comes with a certain level of risk, and therefore, it might not be the best option for everyone. Before going any further, you need to ask yourself one key question: what is a sublet arrangement that you can afford to live with? If you can’t find the right subletter, you should consider alternatives.  First of all, you might be able to negotiate better terms with your landlord and see if there is another solution while you are away on vacation, for example. Your lease might already have the answer to all your problems in the form of an early termination clause. Either way, if you’re uncomfortable with the idea of subletting your space, you should explore the aforementioned options first.
By Vladana Donevski · March 01,2022
Knowledge Base
A Guide to Different Types of Bookkeeping
Bookkeeping is the process of collecting and organizing data on all of your business’s financial transactions. Every expense, payment, as well as any profit is accounted for. This includes sale invoices, payroll ledgers, accounts receivable, assets, and liabilities. Bookkeeping is essentially your business’s cash flow management. It shows how well the company is performing and which areas need attention. Documenting all cash flow in detail gives you a complete overview of your financial activities and your business’s financial state. This overview of the types of bookkeeping will touch upon the difference between single-entry and double-entry bookkeeping, what methods of bookkeeping exist, and how important regular recording of financial transactions is for running a successful company. Basic Bookkeeping Transactions Incoming and outgoing finances are the two main types of business transactions under your bookkeeping.  Incoming finances are your income/revenue, which is all the money earned, sales, and profits. In turn, they become assets, which are all the existing property owned by your business. Any preexisting cash and property are also included.   Outgoing finances are the company’s liabilities - mandatory payments, taxes, and loan installments - and expenses: money used to pay for services, employee salaries, and operational costs.  After these two main bookkeeping categories, we have equity or the difference between the company’s assets and liabilities. How Does Bookkeeping Differ from Accounting? Bookkeeping needs to be done first, before the accountant can analyze the company’s books. It is an essential part of any business finance management. Accounting is the later process where all collected and complete financial data - the trial balance - is analyzed. Accounting includes drawing financial statements based on which timely business decisions can be made. Accountants are also responsible for financial advice and tax returns. Methods of Bookkeeping and How They Work Let's take a look at the specifics of the single-entry and double-entry method. Single-Entry The single-entry method records individual transactions as they happen. Once a sale or payment is received, or an expense is made, it’s documented as a stand-alone entry, plus its minimal details. This bookkeeping method is best suited for smaller businesses. It’s also adequate for operations where there’s little to no physical sales or inventory involved, i.e., digital transactions, services, and those with little or no physical goods to exchange.  Single-entry systems offer multiple advantages: They are simple and therefore save you time and money. Besides, they usually don’t require additional staff or training.  Of course, there are some downsides as well. These include possible loopholes that can be exploited to cover up mistakes and fraudulent transactions, especially if no software or app is used and everything is manual. Furthermore, there is no fast way to check for balances, liabilities, and on-time payments, which can result in penalties and late payments. Also, arithmetic errors in the account totals are relatively common. Using these simple bookkeeping systems for small businesses is a feasible solution, but it most likely won’t be enough for complex operations, where ready financial snapshots are often necessary to help make informed and timely decisions. Double-Entry Double-entry systems are more complex since every transaction is entered twice: in the left-hand account under Debit and in the right-hand account under Credit. Double-entry bookkeeping is used for larger and more complex business operations, and it works like an error-detection tool since the sum of debits must always equal the sum of credits. If it doesn’t, it points to an error. Using the double-entry system makes it easier to monitor all activities and ensure all your books are balanced. The rough total of your capital gap is easily determined.  However, it’s a time-consuming and costly process, and utmost accuracy is needed when making entries. It usually requires extra training, staff, and software for it to be fast and effective. Also, due to the complexity of the system, finding where the error is and correcting it can be challenging.  Compared to the single-entry bookkeeping system, double-entry is a more thorough, time-consuming approach to bookkeeping. Most smaller businesses don’t have time, resources, and extra people to work on detailed bookkeeping. But the results help companies cover everything being exchanged. It also provides instant access to all data.  These are the two basic systems a company can use for bookkeeping. In the past, all entries had to be made manually. With the advancement of technology, various kinds of accounting software and apps have come to the bookkeepers’ aid. Digital Bookkeeping Systems Businesses can reap many benefits from using bookkeeping apps. All primary operations are automated and can be carried out remotely from your phone anytime, anywhere. The main features and automated functions of these apps include: Tracking all outgoing payments and fund transfers Digital tracking of all incoming finances Reports available anytime for mass sending Encryption of financial and confidential business data Apps for both iOs and Android devices Affordable monthly rates starting at $9 External functions such as e-filing and online banking Bookkeeping software such as Quickbooks, Freshbooks, and Zoho have basic accounting features in addition to their comprehensive tracking and management systems. Smaller businesses employing the single-entry method can use these apps to speed up the process further and increase accuracy. If you own a small business and are bent on cutting costs, the chances are that with one of these apps, you won’t even need to hire a bookkeeper - you’ll be able to do the bookkeeping yourself. Virtual bookkeeping means that independent, remote bookkeepers will manage and balance your books instead of a physically present bookkeeper. This is often a time- and cost-saving option for companies. A virtual bookkeeper can manage and monitor your finances in real time beyond office hours. It can be a good solution for companies with a bigger budget allocation specific to these tasks, covering many departments and their complex financial dealings for the company. Often, there are inventories and accounts payable and receivable that need to be checked and prioritized. How Bookkeeping Benefits Your Business There are many advantages to bookkeeping. Financial insights from tracking all your financial transactions will help you manage the business, maintain supplies and payrolls, and keep payments on time. This way, you’ll avoid costly penalties and other negative consequences of late payments.  All numbers will match when your books are balanced at the end of a month, quarter, year, or another specified period. These detailed lists of numbers may look complex and intimidating, but when laid out and checked, they’ll enable you to easily assess priorities.  Even just a simple bookkeeping system can help detail the financial state of your company. Your working capital gap is a good indicator of this - it’s the total difference between your assets and liabilities.  Positive cash flow is maintained and received on time. From here, you can allot budgets and give priority to specific expenses or additions to inventory or assets. Being able to execute the business’s balances correctly and on time will help the company deal with loans, bank payments, and other obligations more efficiently. All of the bookkeeping methods discussed here will help you control your company’s finances and can be a big help to avoid penalties and bigger financial issues when going through an audit process.  
By Milja · August 27,2021
Knowledge Base
Understanding the Types of Accounts in Accounting
The Five Major Types of AccountsIf you’ve heard about debits and credits, you’ll know that the actions of debiting and crediting have an impact on certain accounts by increasing and decreasing them. But, how much do you know about the accounts they affect?Each time you buy or sell a product or a service, you are required to record the transaction in the corresponding account. In other words, you need to keep your business accounting books updated at all times. That way, you can track all the money going out of and coming into your business. Moreover, you’ll know exactly how much money you have in each account. Unless you sort and track your transactions by accounts, you won’t make accurate financial statements and sensible business decisions. Most businesses list their accounts by keeping a chart of accounts (COA) - a document that lets you organize your account types, number each account, and quickly find information about any past transaction.There are five different types of accounts in accounting that provide a structure to the chart of accounts, namely assets, expenses, liabilities, equity, and revenue. Given that their role is to define your business’s channels for spending or receiving money, each account category can be further broken down into several subcategories. It’s also important to note that the five major accounts are interrelated. Therefore, a change in one account triggers a chain reaction, making the other accounts change as well. In this article, we’ve made sure to provide a detailed definition of each account type, analyze its unique features, and offer multiple examples. Asset AccountsAssets are the physical (tangible) or non-physical (intangible) types of property that add value to your business. In other words, assets are resources owned by your company that have monetary value as they can be converted into cash. Depending on the nature of your business, several different things can be classified as assets. Vehicles, computers, equipment, buildings, and cash are considered tangible assets, while your copyrights, trademarks, logos, and similar non-physical items are intangible assets.Note that this account type can be broken down into multiple subaccounts. Here are a few common examples of assets’ sub-accounts: Checking account - This is your company’s bank account. Petty cash - A petty cash fund is a small amount of money used for expenses too minor to merit writing a check. Inventory - A company's inventory usually consists of goods in three stages of production: raw goods, in-progress goods, and finished goods that are ready to be sold. Accounts receivable - Even though your accounts receivable account isn’t the money you already have, it’s considered an asset as it’s the money that’s owed to you. Keep in mind that debits increase assets and credits decrease them. Make sure to debit an asset account each time you add money to it and credit it when taking money from it.Expense AccountsThese accounts reflect the outflow of money. Any cost your company incurs, such as purchasing a service or a product to manufacture goods or generate income, is considered an expense. Examples of expenses include advertising costs, utilities, salaries, rent, and others. Note that some expenses are deductible, which means that they can help you reduce your taxable income. You can deduct business-related travel and direct labor costs. However, you cannot deduct personal expenses, penalties, and donations.Much like various types of assets, expense accounts can also be fractioned in multiple subaccounts such as: Cost of goods sold (COGS) - This refers to the money you have paid for producing the goods you’ve sold. Payroll - Payroll or wages expense is the money paid to the employees for their work.  Rent - This is the cost of renting equipment or office space.  Insurance - This subaccount refers to the cost of the business insurance you’ve used.  Equipment - This is the cost of equipment you’ve purchased.Note that credits decrease business expenses while debits increase them. Therefore, remember to increase your expense accounts each time your company spends money.Liability AccountsLiabilities represent expenses your company has incurred but has yet to pay. These include any debts or obligations to creditors and other third parties to which your business owes money. A company’s financial obligations can be described as current or long-term. Debts that need to be paid within 12 months or less are classified as current liabilities. These mainly consist of monthly operating debts such as the customer deposit and accounts payable. Note that business owners typically use current assets such as the money in the company’s checking account to cover current liabilities. The difference between a company’s current assets and liabilities is called working capital.Noncurrent or long-term liabilities are debts that are paid off in years instead of months. These usually include mortgages, car loans, and business loans used to maintain or purchase fixed assets. Common examples of subaccounts that fall under the liability account category include: Payroll liabilities - This type of liability subaccount includes payroll-related costs such as wages employees have earned but haven’t yet received and taxes withheld from employees. Sales tax liabilities - This subaccount represents your sales tax obligations. Unearned revenue - This account type represents payments received on work that have not been completed yet. Accounts payable - These are the bills your company must pay. They are considered liabilities (not expenses), as these are the costs you have incurred but not paid for yet. Notes payable - These are your company’s financial obligations from signing a promissory note. Mortgage payable - This account type may refer to the mortgage you have on business property or any other business-related mortgage.Note that the general rule for liability accounts is that credits increase them while debits decrease them.Equity AccountsAlso referred to as net worth, equity indicates how much your company is currently worth. This account is of utmost importance to a company’s owner as it represents the value of the owner’s investment in the company. Equity is the difference between your business’s assets and liabilities or, more precisely, the residual interest in your company’s assets after the liabilities have been deducted. Dividends, common stock, and retained earnings are all examples of this account type.The role of equity in a chart of accounts may differ slightly based on whether a business is structured as an LLC, a sole proprietorship, or a corporation. Let’s take a look at some equity subaccount examples: Owner’s equity - Equity is the amount of money that is returned to a business owner if all of the company’s assets are liquidated and all of its debt paid off.  Common stock - This account type is used to record the investment of the company’s owners. Retained earnings - You’ll need this type of equity account to keep track of the earnings of your company (especially if you are running a corporation) and to record when these earnings are given back to the owners in the form of dividends.Keep in mind that an equity account increases through credits and decreases through debits. In other words, each time your assets grow, your equity increases. Also, as liabilities increase, your equity decreases.Revenue AccountsRevenue or income, the last of the five primary types of accounts in accounting, represents the value of the goods or services provided and thus the money your business earns from selling them to clients. This term is also used to denote the money earned from interest and dividends on marketable securities. In short, revenue accounts track the money your business brings in, both from its operations and nonoperating activities. Given that their balance is reset to zero at the beginning of a new accounting period (typically defined as a new fiscal year), revenue accounts are temporary or nominal accounts. Note that most accounting software solutions perform the resetting automatically.Examples of income subaccounts are as follows: Product sales - This account may include the revenue from a service you provide and the value of the products you sell. Earned interest - This account indicates the value of interest earned on investments or bank accounts. Miscellaneous income - Any other type of revenue falls under the miscellaneous income category. According to the rules of accounting, you increase your revenue account by crediting it. In the same vein, by debiting revenue accounts, you’ll decrease them. The Importance of a Chart of AccountsNow that you’ve learned about all the account types that form part of a chart of accounts, it’s time to talk about all the benefits of this financial listing. A chart of accounts lets you organize your company's complex financial data and break it down into easy-to-understand, logical categories. This listing also plays an important role in laying the foundation for all your business’s critical financial reports.However, many business owners consider their charts of accounts much more than just organizational tools. Keeping all your financial data in one place and analyzing the relationship between various accounts can provide invaluable insights into your company’s performance. Here’s an overview of the main benefits a chart of accounts can introduce into your business:1. Understanding your earningsOne of the most apparent advantages of a chart of accounts is that it can give you an excellent insight into your company’s revenue. Not only can this listing show you how much money your company earns, it can also help you pinpoint peaks and valleys in your income account, understand how much cash flow is available for you to use, and calculate how long that amount should last you considering your average monthly business expenses. 2. Spending smarterWe can all agree that a straightforward list of items you spend your hard-earned money on isn’t a sight for sore eyes. However, your chart of accounts can help you shift your perspective, offering a clearer view of your spending habits. That way, you’ll be able not only to deal with your essential recurring expenses such as rent, internet, and utilities but also to inspect other examples of your expenses and maybe even cut down on some costs if needed. 3. Figuring out how much you oweAnother tremendous benefit of a chart of accounts is that it offers a clear picture of how much money you owe, both in current and noncurrent liabilities. A thorough analysis of your company’s chart of accounts can help you figure out how much of your monthly income you can comfortably afford to put toward your debts. It can also help you create a sustainable longer-term debt repayment plan, no matter which types of liabilities you need to deal with. 4. Upgrading your reportsA chart of accounts is essentially a numbered list that organizes your finances into a system of accounts. Having a detailed and accurate chart of accounts makes it easier for your accounting professional, bookkeeping service provider, or yourself to develop in-depth financial reports, such as a cash flow statement, income statement, and balance sheet, which can help you grasp the financial position of your company.5. Simplifying the way you file taxesAn added bonus of keeping a neat and accurate chart of accounts is that it’ll make your life much simpler come tax season. This listing tracks your company’s income and expenses, which are precisely the items you’re required to report on your income tax return each year.
By Milica Milenkovic · September 24,2021
Leave your comment

Your email address will not be published.


There are no comments yet