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Real estate invoice for Purchasing

hello I'm Nick from income digs and welcome to this video tutorial where it is our goal to show you exactly how we use different tools to execute various business processes within the world of real estate investing today's video will focus on purchasing a property and the associated journal entry that you need to make to your accounting books so it's a concept that is relatively simple but if you're not familiar with accounting or if you're just getting started it can be a bit daunting so we're going to talk through it today with a very simple example and we'll use that example to build off of for future videos to show you more real world example so we're going to Dive Right In uh looking over here at our closing statement here this is a sample closing statement hypothetical deal for those of you who have purchased property before you'll notice that this is a lot simpler than most closing statements look but it should help us to communicate the concepts appropriately so we can see here I'm buying the property 123 Main Street in Buffalo New York with my company income digs so looking at the details what I owe to the seller the credits to the seller I'm purchasing this property for $100,000 I also owe the seller some taxes I owe $400 for County taxes and 1350 for school taxes and what this is is a pro-rated amount based on the am part of the year that the owner will not be owning the property so we're assuming that they've already paid their taxes ahead of time but there's a certain amount of time during the year that they won't own the property and so we are responsible for that so the seller's attorney will often do that calculation and add it to the closing statement so the total that I owe to the seller is 101 750 credits to me the purchaser are currently at zero now you'd see a number here if I had put a deposit down on the property I would want to get that credited to me at the closing table again to keep things simple we kept that at zero so now we look at the total to seller do a closing is still at 101 750 we we also need to add in some other costs for closing so we have some recording fees title insurance survey and my buyer's attorney fee so these four fees I would write that check to my attorney they would be handling all of that so those get added to the 10750 to leave me with 13449 total due at closing so that's the amount that I would need to come out of my checking account to close on the deal now again we're assuming that this is a cash deal so no financing involved at all to keep things simple if there's financing involved this gets a lot more complicated the fees go up quite a bit and you'll see a lot more in terms of who gets funds here and there and and how the loan flows through but again let's assume cash deal to keep it simple so that is the data that we're going to use for our journal entry if we move over here to our income digs balance sheet we see a very very very basic balance sheet I have $150,000 in checking and that is um directly associated with my owner's equity so I put that journal entry in because I'm going to need cash to purchase this property so I need to start somewhere so we're going to go ahead and create the journal entry so again I'm using QuickBooks Online I'm going to click create journal entry if you're using some other kind of accounting software this process will be very similar I love QuickBooks online I think it is the best accounting software out there but if you're using something else um this should be very similar so first thing we're going to do is we're going to look at these different columns here quick overview the account is obviously the account that relates to your chart of account so this will go back to your balance sheet your debits and credits that's the essential part of a journal entry we'll be using those the description helps us uh to add some commentary to each line item here to help describe what it is the name column can be used to show who you're paying money to or from uh you can use this as potentially like a vendor column um and this can help you to pull reports um by vendor potentially the business and the class columns are something that you may or may not have depending on the QuickBooks product you use um just very briefly I use the business column and it's also called location tracking U because I have multiple real estate holding companies so this allows me to track my balance sheets my profit and losses by company as long as I consistently make sure that every transaction I put in has a tagged business another example out outside of real estate would be restaurants with multiple locations they want to be able to track their accounts by each location and this would allow them to do that the class column is very similar uh I use the class column as a project column and my project happens to always be a property address so um again this allows an an additional functionality when it comes to reporting I can pull p&l statements I can pull cash flow statements by property and that I see as an essential part of my business now if you're just starting out or if you only have one property you don't have multiple businesses these columns might not be that useful for you and we can ignore them so um with that overview complete let's go ahead and start with our first account now I'm going to be purchasing a property it will be a building it will be a fixed asset I don't have the account set up in my chart of accounts yet as I start typing in one two 3 main streak you'll notice that QuickBooks can't find it but it does give me the option to add it which I'm going to do so I click add category type I'm going to scroll down to fixed asset the detail type I'm going to put buildings and I'm going to leave the rest of this blank I don't need a description for this I'm not going to make it a sub account and for this uh video we're not going to track depreciation now I typically do track depreciation you probably should too if you have rental properties but to keep things simple we'll leave that blank for now save and close so I've created the account and I'm going to use use that account so the first thing I'm going to do is I'm going to debit the 123 Main Street account $100,000 I'm purchasing it for $100,000 I need my books to reflect that purchase price description purchase of 123 Main Street going to leave the name field blank for now next account is going to be my checking account so we we talked over on the closing statement that I need to come to the table with 103 449 I need all of that to come out of my checking account so I'm going to start typing and it pulls up income digs checking click that and it's not 100,000 it's 103 449 that's how much I'm going to need to come to the the closing table with so now my debits are 100,000 my credits are 103 449 these do not equal so a very basic fundamental of um accounting is that when you make a journal entry your debits and your credits must equal each other and this helps you to keep your balance sheet in Balance um QuickBooks won't let me save this without having these two things equal so if I scroll over here and click save you'll see that it won't let me do it the following error has occurred please balance debits and credits this is a nice check that they have in place um because it's impossible to make a journal entry without these two things being equal okay so I need to make up that difference that 3,44 9 and it will be made up by all of these other costs on the closing statement so I'm going to start entering those as well now those are expenses so I'm going to debit those and these will help me to balance out my accounts so I'm going to start by putting in the amounts and the descriptions as I do that um I put in 400 here for County tax now you'll notice I put in County tax in the description I'm going to use the same exact verbiage in my journal entry as appears on the closing statement this helps me to um ensure that everything is exactly equal if in a couple years I want to look back at this journal entry and understand where things came from um these things matching will really help me obviously recording fees title insurance 450 for the survey okay so that those are in there now I'm going to have to go to my accounts and add those now uh next you'll notice though that my debits and credits are now equal 103 449 103 449 this journal entry is almost ready to go I'll fill in these accounts here these are expenses so I have a few different accounts to track expenses um I have one for property tax I recommend you do you do as well okay recording fees I call these Professional Services I like to differentiate these a bit from my um legal fees so I have two categories I have Professional Services and then I have legal okay so those are done all right I'm just going to expand this a bit so I'm pretty much ready to go I can click save and QuickBooks will save this now I will add a couple names here so for property tax we pay that to City of Buffalo just want to show you how that works and again we would use this if we wanted to pull reports by vendor if we wanted to see how much we're spending on vendors I use this for Rehab projects quite a bit I can filter my expenses on vendor so Lowe's Home Depot or kitchen store things like that and that allows me to see how much I'm spending by vendor and I can use that as a negotiating tactic potentially on pricing things like that I am going to fill in um business just because the balance sheet we're showing happens to be an income dig specific balance sheet um and I want to be able to demonstrate that so I'm just going to copy and paste these down I will leave class blank um I don't need it for this example but one thing you'll notice as I finish up here I'll click save and close QuickBooks will prompt me that did not fill in the class fields are you sure you want to save this transaction I want to say yes but this is obviously a nice feature I have it set on my um preferences to prompt me anytime I don't fill in the class field I want to make sure I'm consistently adding those things so this brings us to our balance sheet you'll see that our checking account is at 465513 perfect my total assets are 146 551 this matches up with my Equity I have $150,000 that's when I put in that money into the checking account but my net income is - 3449 those are all my closing account closing cost so this makes complete sense my liabilities and Equity equal my assets and we're good to go so that concludes this video tutorial in the tutorials to come we're going to expand upon this example we're going to add in um some financing we're going to add in some escro accounts and we might even dabble with some credits for rent and for security deposits as well in the meantime please leave your comments or questions uh below and be sure to check out all of the resources available at income.com thanks for watching