A trial balance for a real estate business is a list of every ledger account with its debit or credit balance at a date, where the two columns must total the same amount. The format is the same as for any business. What changes is the accounts: rental income, tenant security deposits, rent receivable, the property itself, the mortgage and the costs of running buildings.
The accounts a property business uses
- Assets (normally debit): cash at bank, rent receivable, prepaid insurance, the property (land and buildings, usually shown separately because land is not depreciated), furniture and fixtures.
- Contra-assets (normally credit): accumulated depreciation on buildings and on fixtures.
- Liabilities (normally credit): accounts payable, tenant security deposits held, rent received in advance, the mortgage or property loan.
- Equity (normally credit): owner's capital, or share capital and retained earnings.
- Income (normally credit): rental income, late fees, other income.
- Expenses (normally debit): property management fees, repairs and maintenance, property tax, insurance, utilities, mortgage interest, depreciation.
A worked example
A small company owns one rented building. The figures are illustrative and the trial balance is at year end.
| Account | Debit | Credit |
|---|---|---|
| Cash at bank | 18,000 | |
| Rent receivable | 4,500 | |
| Prepaid insurance | 1,200 | |
| Investment property: land | 150,000 | |
| Investment property: buildings | 250,000 | |
| Accumulated depreciation: buildings | 60,000 | |
| Furniture and fixtures | 12,000 | |
| Accumulated depreciation: furniture and fixtures | 4,000 | |
| Accounts payable | 3,500 | |
| Tenant security deposits held | 15,000 | |
| Rent received in advance | 2,800 | |
| Mortgage loan | 250,000 | |
| Owner's capital | 54,600 | |
| Rental income | 96,000 | |
| Late fees and other income | 1,500 | |
| Property management fees | 5,200 | |
| Repairs and maintenance | 6,800 | |
| Property tax | 9,000 | |
| Insurance | 3,400 | |
| Utilities | 2,600 | |
| Mortgage interest | 14,400 | |
| Depreciation expense | 10,300 | |
| Total | 487,400 | 487,400 |
Both columns come to 487,400, so the trial balance balances. Two things are worth noticing. The tenant security deposits are a liability, because the money belongs to the tenants until the lease ends. And the mortgage interest is an expense, while the repayments of mortgage principal reduce the loan and never appear as an expense.
How to prepare it
- Choose the date and make sure all rent invoices, receipts and payments up to that date are posted.
- Post period-end adjustments: depreciation on buildings and fixtures, prepaid and accrued expenses, rent received in advance, and interest accrued on the mortgage.
- List each ledger balance in the debit or credit column.
- Total both columns and compare them.
- Review each balance: do rent receivable, deposits and the loan agree to tenant ledgers, the deposit account and the lender's statement?
Common errors in property accounts
- Deposits booked as income. Refundable deposits are a liability until they are forfeited or applied to unpaid rent.
- Repairs versus improvements. A repair that restores the building is an expense. An improvement that adds value or extends its life is normally added to the cost of the property and depreciated.
- Depreciating land. Land is normally not depreciated, so record it in its own account.
- Mortgage principal expensed. Only the interest is a cost. Principal repaid reduces the loan.
- Rent in advance recorded as income. Rent received for a future period is a liability until the period it covers.
- Mixing properties. If you own several properties, a single rental income account hides which ones earn money.
If you own several properties
Keep the trial balance, but track income and cost by property, using separate accounts, cost centres or projects, so each building can be reviewed on its own. Fox Pro Accounting's Budgets & Projects module can be used to report by project, and Reports & Analytics produces the trial balance and statements from the ledger.
Property held for sale or development
This example is for property held to earn rent. A developer or dealer whose properties are held for sale usually carries them as inventory instead, and recognises revenue on sale. Which treatment applies depends on your accounting framework, so confirm it with your accountant.
Frequently asked questions
What is a trial balance in real estate accounting?
It is a list of all the property business's ledger balances, in debit and credit columns, used to confirm that debits equal credits before the financial statements are prepared.
Are tenant security deposits income?
No. A refundable deposit is a liability. It becomes income only when the landlord is entitled to keep it, for example for unpaid rent or damage.
Is rental income a debit or a credit?
A credit. Income accounts normally carry credit balances, and rent receivable is the matching debit balance when rent is owed but not yet paid.
Is property tax an expense?
Yes, for a property that earns rent it is normally an operating expense and carries a debit balance. Tax treatment varies by country, so confirm it with your tax adviser.
For the basics, read Trial Balance Explained, and for the debit and credit rules behind it, Double-Entry Bookkeeping Explained. Depreciation on buildings is covered in Straight-Line vs Reducing Balance Depreciation.