Accounting for Fix and Flipping: What Investors Should Know

A behind the scenes look, mid-reno
It is essential for a fix and flip investor to implement maintainable and accessible systems that help in expanding their business and improve the number of revenues they are earning. Successful fixing and flipping businesses are made up of complicated processes. An important aspect of these complicated processes is related to accounting and bookkeeping.

Accounting for all of the expenses that take place is necessary to achieve success in this field of business. Reducing the overall tax on the business by providing accurate values and accounting shows the investors and other lenders that the business is running professionally.

Developing efficient accounting systems is not hard, especially with the technological advancements in the millennial age. Efficient accounting methods can be made easy by utilizing software and applications that are specifically made for accounting and bookkeeping purposes.

However, ensure that the accounting procedures are not complicated. Keep it as simple as possible while educating your employees who are responsible for accounting. They should know the handling of new technology that you introduce in your business or organization. Below are some ways to stay organized and things that you need to show to your accountant or bookkeeper at the end of the day.

1. Introducing and Developing an Effective Accounting System

The shoebox method is a process in which all the receipts and financial records are collected, stored and handed over to the accountant at the end of the year. This is a cost-effective method and is not very common in the millennial age. Some experts do not recommend this at all.

A more profitable and time-saving method would be to use software programs and applications that cater to accounting services. An example of an application is Expensify which allows the user to scan a receipt, enter the specific amount, categorize it accordingly and then save it into the cloud. It works somewhat similarly to the shoebox method, but it is much easier to maintain and simpler to use.

Regardless of whatever method you use for developing an effective accounting system, make sure that you include the following categories of transactions:

1- Acquisition costs

2- Rehab costs (The improvements made in the household)

3- Repairing costs of the household

4- The holding costs of a property

5- The selling price of the property

6- The selling costs

2. Types of Records that should be kept as a Backup

The laws of a state do not require the records of a fix and flip business, unless there are certain specifications. Any method of recording transactions can be opted for that clearly defines your income and expenses or any other expenses that might take place.

Keep a record of all of the tax assessment cards and maintain the HUD statements alongside all receipts that are inclusive of any transactions that may have taken place. Insurance documents should also be stored along with these in your bookkeeping records.

All external expenses that take place should also be recorded with the supporting documentation. The supporting documentation should show the amount that has been paid and the amount of money that was invested for a business expense.

The expenses documents include:

1- The checks that have been canceled

2- The tapes of the cash register

3- The statements of the accounts

4- The sales slips of all credit cards that have been used in the business

5- Invoices

6- The petty cash slips that are used for small cash payments

3. Decide Whether you are using Cash or Accrual Methods of Accounting

Decide whether you will opt for cash or accrual methods of accounting. The cash method defines the income recognized after the paycheck is received and expenses are recognized after they are paid. Many taxpayers use this method to get their returns.

The accrual method of accounting identifies the income and expenses when they incurred or earned instead of recognizing them after the check or payment is received. How does this imply to fix and flip investors?

When someone deals in a property, the IRS classifies him or her as dealers. This means that, for accounting, the house that the investor is dealing with is his/her inventory. The IRS will, therefore, require the use of the accrual method.

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