5.1 Accounting Methods: Cash vs. Accrual & Chart of Accounts

Property accounting turns transactions into reports the owner can use and records that can be audited. The management agreement, reporting basis, lease, law, program, lender, and accounting policy determine treatment. An ARM should understand the entries and controls without assuming that every owner reports under the same framework.

Cash and accrual bases

For every material transaction, confirm:

• the reporting basis and period;
• the source document and responsible property;
• account and resident or vendor detail;
• authorization and segregation of duties; and
• reconciliation, review, and audit trail.

Cash-basis reporting generally recognizes receipts when received and payments when paid. Accrual reporting generally recognizes revenue when earned and expense when incurred, even if cash moves at another time. Modified or tax-basis reporting can combine rules defined by the owner and accountant.

Under an accrual example, April rent billed and earned in April is April revenue; an unpaid amount remains a receivable subject to policy. A March utility service invoiced in April may require a March accrual if material and required by the reporting basis. Reversals and later invoices must be controlled to prevent duplicate expense.

Do not state that every residential property must use accrual GAAP or that rent is always earned in full on the first day. Lease terms, concessions, collection probability, regulation, reporting standards, and owner policy affect recognition.

Advance rent, deposits, and prepaids

Money received before it is earned is commonly recorded as a liability and recognized when earned under the lease and accounting policy. A refundable resident security deposit is ordinarily a liability because the property may owe it back. Deposit bank account, segregation, interest, receipt, transfer, and reconciliation duties vary by jurisdiction, licensing rule, housing program, management agreement, and client direction.

A payment covering a future benefit, such as an insurance premium, can be recorded as a prepaid asset and allocated over the expected benefit period under the applicable basis. Equal monthly allocation is appropriate only if it faithfully represents the benefit and policy. “Capitalize” should not be confused with classifying a building improvement as capital expenditure.

Reconcile the resident subsidiary ledger, security-deposit liability, designated bank records, and general ledger. Investigate transfers, refunds, forfeitures, stale checks, negative balances, and property changes promptly.

Chart of accounts

A chart of accounts organizes assets, liabilities, equity, revenue, expense, capital, and other activity. Design it to support property, entity, lender, program, tax, and portfolio reporting while preventing duplicate or ambiguous coding. Account-number ranges are organization-specific; there is no standard ARM numbering series.

Use written account definitions and examples. Separate base rent, concessions, vacancy or loss-to-lease where used, utility reimbursement, parking, fees, bad debt, payroll, repairs, contract services, utilities, taxes, insurance, management fees, and capital categories at the detail needed for decision-making. Too little detail hides causes; excessive unused detail creates inconsistent coding.

Control additions and mappings. A new account needs approval, report mapping, budget treatment, user communication, and effective date. Avoid moving costs between operating and capital accounts merely to improve NOI.

Resident ledger and receivables

The resident ledger should reconcile beginning balance, charges, credits, receipts, adjustments, transfers, write-offs, and ending balance to source documents. Apply payments and concessions under the lease, law, assistance contract, and policy. Restrict manual adjustments and require reason, authority, and audit trail.

An aging report groups receivables by elapsed time under the system's definition. Buckets such as current, 31–60, 61–90, and over 90 days are common analytical choices, not legal collection stages. Tie aging totals to the general ledger and investigate unapplied cash, credits, deceased or transferred residents, subsidy delays, duplicate charges, and disputed items.

Collections follow the lease and jurisdiction. Due dates, grace periods, late fees, notice, assistance, payment plans, filing, and acceptance effects are not universal. Apply current policy consistently while recognizing accommodations, bankruptcy, military, program, source-of-income, and other legal requirements.

A delinquency rate can be defined as outstanding eligible receivables divided by eligible billings, but state both numerator, denominator, and measurement date. Do not apply a universal 1% or 3% benchmark.

Bad debt and recoveries

Write-off is an accounting action, not proof that a legal debt disappeared. Timing, allowance, direct write-off, collection referral, credit reporting, tax, and later recovery follow policy and applicable law. Preserve approval and item detail. Post later recoveries to the account specified by the reporting basis and do not recreate a misleading resident balance.

Protect consumer and personal data. Collection vendors need authorized contracts, secure transfer, complaint controls, and reconciliation of fees and remittances.

Accounts payable

A payable control should establish vendor identity, tax and payment data, purchasing authority, scope or purchase order, evidence of receipt, correct price, coding, duplicate detection, approval, payment authority, and bank release. A three-way match compares authorization, receipt, and invoice when the purchase process generates those records. Not every lawful small purchase has a formal receiving report, so use proportionate alternative evidence.

Separate vendor creation or change, invoice entry, approval, payment release, and bank reconciliation where staffing permits. Independently verify bank-detail changes through a trusted contact path. Review duplicate invoice numbers, round-dollar bills, unusual addresses, weekend changes, split purchases, and payments just below authority thresholds.

Spending limits come from the management agreement and owner policy, not a universal dollar table. Emergency authority should be documented, with later notice and review.

Early-payment terms such as “2/10, net 30” mean a stated 2% discount if paid within 10 days, otherwise full payment under the 30-day term, subject to the actual invoice. Capture the discount only after confirming receipt, quality, cash priorities, and authority. The common simple annualized cost of forgoing it is approximate and should not override risk or contract terms.

Lien and closeout controls

Construction and repair work can create mechanic's-lien rights under state law. Contract, preliminary notice, waiver, retainage, payment, and release rules vary. Obtain the conditional or unconditional waiver and subcontractor evidence required for the jurisdiction and project; do not demand a form that unlawfully waives future rights.

At month end, reconcile bank accounts, resident ledgers, deposits, receivables, payables, accruals, prepaids, capital work, and intercompany or owner balances. Review unusual entries and certify only after correction or disclosure. Strong accounting is not a rigid account list—it is traceable treatment, appropriate authority, segregation, reconciliation, and truthful reporting.