A Respectful Distance: Separating Tenant-owed Liability Banking for Painless Audit

Ideal bookkeeping is good judgment and intelligent organization within the bounds of regulation. While consolidation is often the key to organization, in some cases modest additional detail, or extension of a process can drastically improve property bookkeeping processes. Sensible choices when setting up the company banking and chart of accounts will put the books on track for smooth upkeep and painless auditing, internal or third party, but not all best practices are applied through the bookkeeping itself.

Instead, strategic setup in reality is often the first step, and enables painless audit of the property books, and when using Buildium as your accounting software, this can be particularly key. One example of this is adjusting real world bank account setup to separate rental owner trust money from the tenant security deposits, instead of trust and company operating alone. With unit level reporting, combining owner trust and tenant money in the same real bank account may not prove challenging, but in Buildium financial records can be filtered down to the property level at lowest, which can complicate following the money when balances don’t match reality or cannot be aligned with each other. Given this, it is recommended that all broker / property management model companies relying on the Buildium software for their bookkeeping, have three real world bank accounts: 

  • Rental Trust bank account account for handling inbound rent monies, payments to vendors for operating expenses, receiving recoverables and holding property reserve funds. The money is kept separate among the single bank account’s funds using different ledgers for the tenants and properties. 
  • Security Deposits (Escrow) for holding SDs and accruing interest, the latter of which is required in some states. While it is illegal to commingle funds which are collected on behalf of a trustee with the company cash in the operating account, separating rent money and security deposits directly supports upkeep and audit.
  • Company Operating for holding company equity, receiving company income which never touches the property (think placement fees) and disbursing non-operating expense payments such as payroll, office supplies, travel & entertainment, etc.

Directing the motion of money through these bank accounts will allow for considerably more streamlined auditing. Smart real world motion of the cash enables smart record keeping, which is then further bolted down with consistent timing, memo format, and workflows, to drive efficiency for entry.

For example, when new tenant initial costs are collected, some management companies accept the initial rent payment and the security deposit as a single payment, with the two portions only distinguished by the general ledger account used when allocating the received check, money order, or other non-splittable payment. For some, it is undefined how the rent payments should be submitted, often to avoid non-payment and provide a customer centric service.

That’s great from some perspectives, however, this method is ultimately governed by convenience rather than serving the bookkeeping. In most states, it’s okay from a regulatory perspective to have rent and security hit the same bank account (see your state’s .gov for more information about local trust accounting regulations), and often the sensibility is, fewer bank accounts, fewer trackables, but there are pitfalls in that logic, namely that the total deposited amount in the rental trust bank account for a specific unit would not match the original total tenant payment amount for security deposit liability.

Mistakes can happen with human entry work, so having similar line items on book ledgers with their equivalent line items in a real bank account makes tracking down misallocations, incorrect transfers, and other common move in/move out actions significantly easier to audit and correct. That is the extra piece of information we get by keeping the security deposit and rental accounts separate. Let’s explore some scenarios illustrating how this simple separation supports auditing the books:

A tenant makes payment for the first month’s rent and security deposit as two separate money orders to the company. Both are recorded on the tenant ledger and allocated correctly on the books creating two undeposited funds items.

  • If the payment entries are correct on the books but the real-world deposit is missed, you will see an exact discrepancy between the bank account cash asset on the books and the real world account balance, which will present itself through bank reconciliation. Bank reconciliation isn’t just a way to further reinforce transparency and demonstrate good judgment, but rather it is a primary filter for error, in the books and in reality.
  • Moving tenant deposits back to the trust before withhold allows for clean in/out of the SD bank account and will prevent intricacies in the cash audits. The property management company is then already prepared to make a real world transfer to match and then disburse withheld funds to vendors.
  • Until unit level reporting is rolled out in Buildium, consistent memos across all transactions related to that event, as well as strict processes for real world collection will significantly simplify auditing held liabilities.

There are still limitations to the connection points that modern property management software can handle, with Buildium being no exception, but having measures in place to anticipate those limitations can be the difference between a rapid solution and a cluster headache, when it comes to following the money.