Chart of Accounts

A chart of accounts is a classification or arrangement of account items by type of income or expense as well as by assets and liabilities, accounts receivable, and accounts payable. Charts of accounts are customized to fit the purposes of a business. The kinds of accounts to be set up are defined by the purposes and plans of the business, and related accounts are grouped by function. For example, a real estate management firm would include rent as income (from tenants) and as an expense (for its own offices) as two separate categories in its chart of accounts. Even though both might be labeled “rent,” they have different functions: one is income, and the other is an expense. Much of accounting is about placing money into proper categories.

Note: The U.S. Department of Housing and Urban Development (HUD) has a standard chart of accounts for assisted or subsidized multifamily housing. More information can be found at http://http://www.hud.gov.

Categorizing Expenses
Because expenses involve many different functions, separate line items are set up under various classifications. For example, landscape services appear under the larger category called “Operating & Maintenance,” and “Management fee” shows up under the category named “Administrative.”

The Importance of the Chart of Accounts
The chart of accounts is an important system for classifying income and expenses, which are the two major categories. Getting high-quality information requires planning, and the chart of accounts is a good place to begin. Because all income and expenses will flow through the accounts listed there, the chart of accounts is central to record keeping. The classifications should reflect all sources of income and expenses. A well-designed chart of accounts enhances accuracy, produces useful information, and reflects the organization of the business.

Refining the kinds of information collected is important. For example, setting up a single category called “Landscape” that covers normal maintenance, seasonal repairs, landscaping contracts, and the capital budget for a new courtyard almost guarantees poor information because the category is too broad. Each of the components should be kept separate since each has a different function and involves different expenses.

Accounts Receivable
Accounts receivable are accounts waiting to receive money for goods or services that the company has sold. They are revenues to be collected. Monthly rent is a good example of a receivable; tenants owe the rent indicated in their leases.

Close management of receivables helps keep a constant and even flow of cash into a company. Receivables should be collected as quickly as possible and should be deposited in the bank promptly. At a rental property (whether residential or commercial), close attention to receivables means keeping track of rent payments, noting late payments, and quickly contacting tenants who have not paid on time. Depositing all receipts daily is a good control measure that can help management more quickly determine which accounts are suffering from “nonsufficient funds.”

Working hard to collect receivables and making disbursements judiciously can allow for greater control of cash. Proper collection of receivables and control of disbursements have a major impact on the budget in general.

Accounts Payable
Accounts payable are payments that a company will make from its various accounts, for example, from accounts for plumbing repairs, janitorial supplies, and pest control to vendors, suppliers, and providers of services. They are debts that a company owes to a creditor. If a real estate manager contracts with painters to repair the walls and paint an apartment or office, the invoice from the painters goes to accounts payable.

Accounts payable and accounts receivable are short-term debt, which means that they will be settled during the current accounting period. To monitor how money flows from a business, it is important to make sure that the invoice itself is accurate, that the payment is made on time, and that the payment goes to the right company or person.