Keeping your balance sheet... well, balanced

Yesterday I talked a bit about some of the stuff you need to have prepared before you get into investment property. That was a bit of a lie. I didn't bother trying to set up any accounting system until we had already closed on our first house. But that doesn't mean that you can just blow it off. Here's a screenshot of the google spreadsheet that I use to track our expenses.


OK, this unfortunately didn't come out nearly as well as I had hoped, so if you click on the photo it will take you to my Picasa site where the screenshot is actually readable. I kinda felt like the Pentagon as I censored all the references to actual people or locations. Bear in mind as you view this that thes are actual transactions that have occured in our company over the last month and a half. All of the numbers are real.

But now let's discuss what information I include in my Accounting Sheet and why. Each one of these columns has a very specific purpose.

Type - This declares the type of transaction that occurred. An expense is something that we paid money for that is tax deductible. Transfers are when we deposit or withdraw cash in a manner that the IRS doesn't care about (such as putting our own money in the account). Income is something that the IRS wants to tax us for. (You'll notice that mortgage payments get their own category apart from expense. That's because they are handled in a very different way than regular deductions).

Date - for obvious reasons.

Then I have three categories for cash amounts; Expenses, Income, and Transfers. Each of these needs to be kept separate come tax-time and I find prefer to keep them in separate columns soley for aesthetic purposes. As explained above, Expenses is for anything we intend to claim some sort of tax write-off for. Income is for anything we expect the IRS to tax. And Transfers are for events that the IRS doesn't care about

We count our deposits as a transfer, we don't claim income when they are paid, but we don't claim a deduction when we return them. I'm fairly certain that is a legal way to handle those transactions. Of course any interest we pay upon the return would go down as a deduction. Does any one know if this is correct?

Paid By - this category is for determining who paid for what. Usually all expenses are paid by the company with the company credit card. However sometime Biff or I have to pay for something with our own cash or credit. In that situation I mark that expense so that whoever paid it can be compensated.

Description - Again with the obvious. Don't slack on this field. You'll be surprised when, 6 months later, you look back at this sheet and have no idea what you spent your money on.

Property - The IRS, when filling out your taxes, asks that you break up your expenses by unit. This field allows you to more easily assign your expenses and your income according to each property. If you have only one property, this is obviously a moot column. But if you ever expand your business, then you'll find this column can save you a lot of time.

Well, there it is. My entire accounting system. It's awfully simple and anyone could fill out those columns if they had any idea of what was going on. Yet it still contains all the data, easily organized, that the IRS will want from you in April. The hardest part of the spreadsheet is simply the discipline to record data on it on a regular basis.

Thus, one of Biff's more crucial roles in the company. Keeping me honest. This weekend I will unfortunately be out of town and unable to blog. But next week I think I'll start by discussing partners in real estate ventures. Advantages and pit falls.