Chart of Accounts

Setting up a Chart of Accounts for a Commercial Real Estate Company

A good chart of accounts is the foundation for good record keeping. This is true for all industries, including commercial real estate.

What would you do if one of your tenants requested additional information about a specific type of expense from the previous year? For many organizations, this request creates hours of work. And it also highlights the need for a financial, organizational overhaul. The start of a financial overhaul, or getting started on the right foot, is a solid chart of accounts.

We recently created a second sample chart of accounts (COA) focused on companies that own and manage commercial real estate. Every industry sector has specific needs, and real estate is no different. In the newly created COA (which you can find at the bottom of this article), we outline the most common accounts used in the industry. Our previous chart of accounts, which you can find in the article here, focused more heavily on the accounts needed to manage residential real estate. Our new chart of accounts addresses the need for tracking expense types commonly associated with triple-net leases which include Common Area Maintenance (CAM)/Reimbursable Expenses.

This is the tip of the iceberg on what we are going to cover in this article. 

Before diving into the COA, we need to highlight a few things that drive how you want to set up your new accounting structure.

Preparing for CAM Reconciliation

One of the big differences between residential and commercial real estate is the use of triple net leases (NNN). With the use of NNN leases comes a different kind of expense grouping. One of these expense types that need to be tracked and managed are operational expenses, commonly referred to as Common Area Maintenance (CAM). 




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These operational expenses are fees paid by the tenants to help cover the costs associated with operating and overhead expenses for the common area. NNN leases typically consist of three main components, property taxes, insurance, and CAM. It is important to track and manage these expenses carefully. 

CAM reconciliation generally happens at the end of the year or the beginning of the following year. At that time, the landlord provides a reporting of all the expenses incurred during the year. The tenant has a responsibility to cover their portion of the building expenses for the year. The tenant portion is frequently referred to as the pro-rata share. The specific tenant financial responsibilities are generally outlined in the lease.

Terms in the Lease

As outlined in the lease, the tenant agrees to pay a certain amount (usually monthly) to cover these operational expenses. When the reconciliation report is generated, if the owner’s expenses were greater than the amount collected from the tenant during the year, the tenant may owe for the remaining difference. On the other hand, if the expenses were less than what the tenant paid, the landlord may refund or reduce the following year’s monthly CAM charges accordingly.

Either way, the landlord/owner must have a clean record of all the expenses incurred throughout the year to ensure full repayment of the CAM expenses. Plus, it is necessary for future budgeting. 

Keep in mind, CAM expenses are just one area of expenses that need to be tracked. We will address the other areas as well below. A good way to track expenses is to use the class function in QuickBooks. If you want to learn more about CAM reconciliation, check out this article. But first, let’s address classes.

To Class or Not to Class

Classes are a great tool in QuickBooks to keep track of income, expense, and net profit of different segments (or buildings) within your business. Think of it as having a separate set of books, segmented by class, within one QuickBooks account. For commercial real estate, classes make it simple to see how each asset, building, or unit is doing compared to the others. The use of classes allows you to see your entire organization within that QuickBooks account easily within the Profit & Loss Report (P&L). 

Some people prefer to use sub-accounts rather than classes. And while there are some benefits to using sub-accounts, there are some notable drawbacks. These concerns are particularly true if you have a lot of sub-accounts. First, when using sub-accounts, your P&L can get very long and unwieldy. Then, when collapsing to see the parent account, you lose the details you were trying to see in the first place. Additionally, the use of sub-accounts makes it far easier to make mistakes when posting entries.

On the other hand, when using classes, you post a transaction to the main expense or income account. The class does the rest. As a bonus, you can enable a setting to alert you if no class is selected. This safety mechanism prevents you from posting without a class by accident. 

One thing to keep in mind with the use of classes is that the Balance Sheet represents the company as a whole. The individual classes are not broken down on the Balance Sheet. Depending on your organization’s needs, this may not work for you, and you will still want to use the sub-accounts as well.  If you need to see each building separately on the Balance Sheet and the P&L, you may want to consider a separate QuickBooks accounts.

The Actual Commercial Chart of Accounts

Every set of books will be slightly different based on your needs. For instance, in our sample COA, we include Elevators as a Reimbursable Expense. However, if you do not have an elevator, then this does not apply to your COA. This is the same thing as with an Overhead and Business/Operating Expenses. Automobile Expenses for one company may be a Business Expense and Overhead Expense for another company. Based on our commercial real estate customers and advice from tax accountants, we have compiled a list which will get you pointed in the right direction. If you have questions about a specific account and where it should go on your P&L, it is best to ask your accountant or tax accountant for their advice.

Problems with Numbering

Why should you use a numbering system on your COA? Each account created in the chart of accounts is typically assigned a unique name and a unique number to identify the account. These accounts are typically five or more digits and each. The first digit will signify what type of account it is, whether it be an asset, liability, etc. This numbering schema is widely accepted as well, so when you are working with other accountants or bookkeepers, you are speaking the same language on what the account signifies.

NumberDescriptionPurpose
10000 - 19999AssetsBank accounts and any real estate owned
20000 - 29999LiabilitiesAnything owed including mortgages and credit cards
30000 - 39999EquityEquity represents the shareholder's stake in the company
40000 - 49999RevenuesAmount earned with income-producing properties
50000 - 59999Operating ExpensesDirectly related to the sale of your service (not typically used in a service business)
60000 - 69999Overhead ExpensesAmount spent to run your real estate business, including payroll, advertising, etc.
70000 - 79999Non-Operating IncomeIncome created by non-operating activities such as investments, earned interest, etc
80000 - 89999Debt Services Expenses to track your capital gains/losses on the property, investments, etc.
90000 - 99999Miscellaneous Other ExpensesMisc non-operating and non-overhead expenses incurred that are infrequent expenses

Some accounts may be used for Building/Operating Expense, Overhead Expense, or both. If this is the case, create a different account in each of the expenses and clearly label them. 

Correct Labeling is Key

Labeling is the key to making sure that your expenses are recorded correctly. This will save a lot of time and frustration, verifying that the transactions are correctly posted. Clear labeling will also save you money when your tax accountant is preparing your tax returns at the end of the year.

Let’s talk through an example. Utilities can show up in three separate expense accounts, depending on your needs. In our sample chart of accounts for expenses, we use the labeling of “Reimbursable,” “Business,” and “Overhead.” This separation of expenses allows for clear bookkeeping. 

  • Reimbursable – these are expenses that need to be separated for NNN leases. This separation helps when doing CAM Reconciliations at the end of the year or quarter to differentiate between expenses allowed to be included in the NNN charges and those that are not. Exactly what is reimbursable varies by property type and the lease.  
  • Business – these are expenses that are directly related to the activity of renting commercial real estate. These expenses are incurred during the day to day activities directly related to producing income from your rental income-producing real estate business.
  • Overhead – these expenses are related to the running of the real estate business. Think of it this way, would you have this expense even if one of your buildings is not being rented? Your cell phone bill would need to be paid even if your buildings are not currently being rented.

Finally, when creating a chart of accounts, it is important to leave a gap between numbers in the event you want to add additional accounts. Your goal is to keep your COA between 50 and 100 accounts, if possible. As you will see, that can be difficult.

Importing of COA in QuickBooks

If you are using QuickBooks, when you are setting up the new company, it gives you the option to start with their sample COA for your industry. 

Using the industry default from the system has its advantages and disadvantages. If you do not already have a COA as a baseline to begin from, the industry default may be your best way to get started. However, in the long run, this often results in many more adjustments to meet your specific needs. That’s why we created a sample commercial COA for commercial real estate.

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The Steps for Importing

Below we have outlined the steps for uploading a COA to a QuickBooks Online (QBO) account. 

Begin by going to the left-hand side of QBO and selecting Accounting, and then select Chart of Accounts. A picture will appear with the green button to “See your Chart of Accounts” to select.

Select the Chart of Accounts in QuickBooks Online

Next, use the green drop down on the top left to select “New” and then “Import.”

Select New Import for QuickBooks Chart of Accounts

Browse for the Excel file you saved on your drive. You will want to make any modifications prior to uploading. Note: You can access our sample commercial COA at the bottom of this article.

Select File to use for Importing the Chart of Accounts in QuickBooks Online

Once imported, verify the fields from the Excel document are correctly mapped within your QuickBooks Online account.

Verify the Import Fields for the Chart of Accounts Import to QuickBooks Online

The last screen will be the imported COA for you to review and make any final changes before saving. You can always adjust and edit later as needed, but it is less work to make edits at this stage.

Verify and change if necessary the imported Chart of Accounts in QuickBooks Online

Once everything is in QBO, you will want to create sub-accounts for any accounts that have parent accounts. Select the account that needs to be edited and make it a sub-account under the parent account as shown in the example below.

How to create a sun-account in QuickBooks Online

In our downloadable sample, anything with a carrot is a sub-account. If you follow this process, it will allow you to collapse certain categories when looking at the P&L.

Our sample commercial real estate COA includes the type and the detail type needed for QuickBooks to get all of the accounts in the correct place on the first try. It also includes the numbering. Alter, add, or delete the accounts that you may need on the worksheet and it is ready for importing. This is a much easier process than changing all of the accounts in the auto set up. 


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Start with the Basics for your COA

Based on years of experience as an accountant servicing the real estate community, I have seen many financial statements. A well-run real estate company starts with a clean and well-developed chart of accounts that is consistent. The chart of accounts is the foundation for all good reporting and allows for faster decision making. Invest the time upfront. It will save you time and money on the backend when you are preparing your CAM reconciliations or taxes.

Below we have provided a view and descriptions for each of the accounts in our commercial real estate COA. You can access a copy of the COA below the table.

(WARNING: This is a long table below, but it is useful content.)

Account NumberAccount DescriptionTypeUse
10000Bank AccountsBankRecord all deposits or checks in this account
10700EscrowBankSome investors like to their insurance and taxes to be paid out of escrow which means the money is collected in advance and then paid out each month
12000Accounts ReceivableAccounts Receivable (A/R)Accounts Receivable (A/R) is money that customers owe you for
12010Rents ReceivableAccounts Receivable (A/R)These are unpaid or unapplied rents
12050Intercompany Notes Receivable Other Current AssetsAny mortgage or real estate loans your business has made or purchased in other companies owned by the same company
13000Inventory AssetOther Current AssetsThe cost of goods your business purchases for resale. An account automatically created in QuickBooks
14000Prepaid ExpensesOther Current AssetsTo record payments for expenses that you have already expensed but have not yet paid
14500Uncategorized AssetsOther Current AssetsFor current assets not covered by the other types typically used within the year
14700Undeposited FundOther Current AssetsA holding account for cash or checks that haven't been deposited yet
15000LandFixed AssetsSeparate out the value of the property and the land. Each land asset will have a separate account
15500Property ImprovementsFixed AssetsRecord all property improvements that are greater than $2500. Each property will have its own account to attribute any improvements to
16000BuildingFixed AssetsTo track the cost of structures you own and use for your business. Separate out the value of the dwelling and the land. Each property will have a separate account
16500Building ImprovementFixed Assets Record all building improvements that are greater than $2500. Each property will have its own account to attribute any improvements to
17000Closing CostsFixed AssetsClosing costs related to an asset that will increase the asset's value.
18000Furniture & EquipmentFixed AssetsAny furniture, fixtures, and equipment your business owns and uses
19000Accumulated DepreciationFixed AssetsEach property (not land) will have depreciation each year that needs to be recorded
19900Security Deposits HeldOther AssetsAsset account for security deposits held for tenants.
20000Accounts PayableAccounts Payable (A/P)Accounts Payable (A/P) is the amount you owe to your vendors
21000Credit CardsCredit CardThe credit card accounts
22000Payroll LiabilitiesOther Current LiabilityThe amount of taxes that you owe to Federal, State, and Local government agencies for payroll taxes you have withheld from employee paychecks but not yet paid
23000Tenant Security Deposits HeldOther Current LiabilitySecurity Deposits held on behalf of your tenants. They do not belong to your business unless used when the tenant vacates
25000Intercompany Notes PayableLong Term LiabilitiesLoans or notes that are payable within the organization in the long-term
26000Notes Payable/LoanLong Term LiabilitiesLong-term notes, mortgages, lines of credit, or loans. Each property will have its own account to record the mortgage
30000Equity AccountsEquityAny equity put into the business should be accounted for here
38000Retained EarningsEquityRetained Earnings is the net income from previous fiscal years
39000Opening Balance EquityEquityAccount used to start an account and should be a zero balance
40000Rental IncomeIncomeAny Rental Income produced by rent producing income property. If you are using Classes, there's no need to have individual accounts per property
41000CAM & Recovery IncomeIncomeAny Reimbursable Income received. Typically used for NNN Leases
42000Commission IncomeIncomeTo record income collected for Commissions
43000Tenant Late Charge IncomeIncomeLate payments fees and interest received from tenant
44000Other IncomeIncomeThis might include pet rent, appliance rents, garage rent, storage, etc. Can split out to the degree you want to be able to analyze your income from these different income streams
48000Services IncomeIncome Account created by QuickBooks for income from a product or service
49000Uncategorized IncomeIncomeAccount created by QuickBooks for income as part of the Online Banking feature
49000Unapplied Cash Payment IncomeIncomeA holding account for income that has been received but not yet posted to an invoice for a tenant
50000Reimbursable ExpensesExpensesParent account for Reimbursable Expenses, those that are incurred and expected to be paid for by tenants with NNN leases
50100Reimbursable > CleaningExpensesCAM/Reimbursable expense from tenant for cleaning of common area
50200Reimbursable > ElevatorsExpensesCAM/Reimbursable expense from tenant for elevators
50300Reimbursable > HVACExpensesCAM/Reimbursable expense from tenant for HVAC
50400Reimbursable > LandscapingExpensesCAM/Reimbursable expense from tenant for landscaping
50500Reimbursable > Plumbing and Electrical RepairsExpensesCAM/Reimbursable expense from tenant for plumbing and electrical repairs. Can split into two if needed
50600Reimbursable > Repairs and MaintenanceExpensesCAM/Reimbursable expense from tenant for general repairs & maintenance. Can add additional accounts if needed to be more specific
50700Reimbursable > Safety/Security ContractsExpensesCAM/Reimbursable expense from tenant for security or safety contracts
50800Reimbursable > Snow RemovalExpensesCAM/Reimbursable expense from tenant for snow removal
50900Reimbursable Utilities > ElectricExpensesCAM/Reimbursable expense from tenant for electricity. Can be combined into one Utility account if desired
51000Reimbursable Utilities > GasExpensesCAM/Reimbursable expense from tenant for gas. Can be combined into one Utility account if desired
51100Reimbursable Utilities > Trash/Water/SewerExpensesCAM/Reimbursable expense from tenant for trash, water and sewer. Can be combined into one Utility account if desired
52000Insurance ExpenseExpensesInsurance expense paid for your real estate business properties
53000Notes Payable Interest ExpenseExpensesInterest paid on notes payable, mortgage, LOC, construction loan, etc
54000Property TaxesExpensesProperty taxes paid on your real estate business properties
55000Business ExpensesExpensesParent account for Business/Operational Expenses that are not reimbursable
55100Business > Cleaning/JanitorialExpensesCleaning or janitorial expenses for your business not directly associated with one building or tenant and not reimbursable by tenant
55200Business > Commission ExpenseExpensesCommission expenses for your business not directly associated with one building or tenant and not reimbursable by tenant
55300Business > Equipment RentalExpensesEquipment Rental expenses for your business not directly associated with one building or tenant and not reimbursable by tenant
55400Business > InspectionsExpensesInspections for your business not directly associated with one building or tenant and not reimbursable by tenant
55500Business > Property License and PermitsExpensesProperty Licenses and Permits for your business not directly associated with one building or tenant and not reimbursable by tenant
55600Business > MaterialsExpensesMaterials for your business not directly associated with one building or tenant and not reimbursable by tenant
55700Business > Property Management FeesExpensesProperty Management Fees not directly associated with one building or tenant and not reimbursable by tenant
55800Business > Repair & MaintenanceExpensesRepairs and Maintenance for your business not reimbursable by tenant
55900Business > Small ToolsExpensesSmall Tools purchased not directly associated with one building or tenant and not reimbursable by tenant
59000Business > Uncategorized ExpensesExpensesUncategorized Expenses not directly associated with one building or tenant and not reimbursable by tenant
60000Overhead ExpensesExpensesParent account for all overhead expenses for the real estate business
60100Overhead > Advertising & PromotionExpensesAny money spent promoting your company in advertising
60200Overhead > Automobile ExpenseExpensesAny costs associated with vehicles that are overhead expenses
60300Overhead > Bank Service FeesExpensesPayments made to financial institutions that could include overdraft fees, fees for checks, etc.
60400Overhead > Computer SoftwareExpensesComputer Software purchased for your real estate business
60500Overhead > Consulting FeesExpensesConsulting Fees paid as overhead for your real estate business
60600Overhead > Continuing EducationExpensesContinuing Education for employees or owner for your real estate business
60700Overhead > Dues and SubscriptionsExpensesAny dues & subscriptions related to running your real estate business
60800Overhead > EntertainmentExpensesExpenses to entertain employees
60900Overhead > Insurance General LiabilityExpensesGeneral Liability Insurance paid for employees
61000Overhead > Insurance Workers CompExpensesWorkers Compensation paid for employees
61100Overhead > InternetExpensesInternet for your real estate business
61200Overhead > Legal FeesExpensesLegal Fees for your real estate business not specific to a certain asset
61300Overhead > Meals ExpensesMeals for your real estate business
61400Overhead > Office SuppliesExpensesOffice Supplies for your real estate business
61500Overhead > PayrollExpensesPayroll for your real estate business
61600Overhead > Payroll TaxesExpensesPayroll Taxes for your real estate business. Will need to add specific taxes or let the software add them for you when the payroll function is used
61700Overhead > Postage and DeliveryExpensesPostage and Delivery charges for your real estate business
61800Overhead > Professional FeesExpensesCan include separate accounts for Legal, accounting, consulting, or memberships
61900Overhead > Office Rent ExpenseExpensesOffice rent expense if paying rent for your business' office
62000Overhead > Telephone/Cell PhoneExpensesTelephone or Cell Phone expenses for your real estate business
62100Overhead > TrashExpensesTrash service or pick up for your real estate business
62200Overhead > Travel & ParkingExpensesTravel and parking for your real estate business in general
62300Overhead > Utilities ExpensesUtilities paid for your real estate business office
69000Overhead > Uncategorized ExpensesExpensesAny other overhead expenses that do not fit into a category. This should be used rarely
70000Interest IncomeOther IncomeInterest that is earned from investments, assets, etc.
71000Insurance Proceeds ReceivedOther IncomeMonies received from insurance proceeds
72000Uncategorized IncomeOther IncomeAny other income that do not fit into a category and is to go below the line on the P&L. This should be used rarely
80000Capital Gains/LossesOther ExpenseThe gains or losses from the sale of real estate in the organization
90000Ask My AccountantOther ExpenseA temporary hold or suspense account until you can ask your accountant where an expense should be posted to
91000Depreciation ExpenseOther ExpenseThe expense related to the depreciation of an asset
93000Other ExpensesOther ExpenseAny unusual or infrequent expenses that don't belong to any another other expense type.
94000Charitable Contributions/Gifts Other ExpenseGifts to charity and contributions
99000Reconciliation DiscrepanciesOther ExpenseUsed to account for small discrepancies that can not be reconciled

Download your free sample commercial real estate focused Chart of Accounts.

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Jennifer Clarke
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Summary
Setting up Chart of Accounts for a Commercial Real Estate Company
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Setting up Chart of Accounts for a Commercial Real Estate Company
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In this article, we share how to set up a chart of accounts for a commercial real estate company and some considerations when starting out.
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STRATAFOLIO
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