The Financial Diagnostics report is one of the most useful tools in AppFolio, however, most people don't know that it exists. For those of you who do know what it is, do you know how to make the corrections properly? Some of you do, but most people make "bandaid entries" like non-cash Journal Entries or receipts that never clear the reconciliation. Today, we are going to briefly go over the Financial Diagnostics sections related to tenant security deposit liability and how to avoid future issues.
AppFolio does a good job of dropping little tips and tricks throughout the software. For instance, you can review details about any of the Diagnostics sections by hovering over the "i" to the right of each section title. But, we will go ahead and summarize the meaning of the sections in this blog to save you the trip:
This section focuses on discrepancies on the Property Level versus the Tenant Level. It compares the two by running a General Ledger for all key security deposit accounts. You can check what those are by going to your name in the upper right corner > General Settings > Manage Accounting Settings > Under "Other Key Accounts" > "Security Deposit Account" and "Additional Deposit Accounts".
In this section, you will find discrepancies between your Security Deposit/Escrow Cash balance and the Security Deposit liability accounts offset to that cash account. These two amounts should always be the same, and if they are not, they show here.
The Clearing account is a pass-through account in AppFolio that should always have a balance of $0.00. A common way to explain this is like a parking spot: It's a temporary holding spot, but whatever goes in must eventually come out. That holds true for the Clearing account in AppFolio as well. When you move out a tenant, all refunds will go through Clearing and all transfers between two bank accounts will also be offset to the clearing GL account. As long as you are following the move-out flow process, you shouldn't have any issues here.
Ideally, your diagnostics should be clean when you close out your books each month, and before you send any owner or management fee payments. The reasoning for this is you may have errors in a move-out, funds that need to be transferred, or security deposits that are unapplied or applied to the wrong GL account.
So, how would you avoid issues in these sections on your diagnostics?
In this blog, we went over the three main sections on the diagnostics that deal with security deposit liability and how to avoid issues in those sections. If you have questions on additional sections in the diagnostics, or how to research outstanding issues, please reach us on our website or by calling or texting 281-949-8755.