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DOUBLE-ENTRY ACCOUNTING FOR SHARED PROPERTY

Posted on 2014-11-27
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Last Modified: 2014-11-30
I think I’m looking for the “experts-exchange.com” for accountancy, can anyone recommend one? I need help in tidying up accounts on a private family property project, and am looking for an accountant to check the steps as I walk through them. Below is an outline of the first steps which I am looking for advice to confirm or correct:

The currency is GBP but happy to talk in dollar for illustration purposes.

Step 1: Opening balance: Family property worth 100k, owned jointly by John, Anna, and Alex, split 40:30:30

Debit 100k: Property asset account
Credit 40k: John's equity account
Credit 30k: Anna's equity account
Credit 30k: Alex's equity account

Step 2: Alex invests 66k from his bank account to develop the property, and 118k worth of his time

Debit 66k: Capital expense account
Credit 66k: Alex's cash account

Debit 118k: Capital expense account
Credit 118k: Alex's "sweat equity" account ?

Step 3: The property is revalued at 300k, an increase of 200k on the initial value

Not sure what to do here initially, maybe

Debit 200k: property asset account
Credit 200k: capital expense account ?

That's it for now. I would envisage maybe upto a dozen similar-sized questions spread over a number of weeks, and in parallel I would study material eg from www.principlesofaccounting.com to understand the processes better. I would be willing to pay for professional support if anyone can recommend an online resource I would be very greatful.

Thanks!
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Question by:xenium
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Author Comment

by:xenium
ID: 40468916
PS copy of the above shared to google docs, inline comments welcome: https://docs.google.com/document/d/1mrCEIPmAcL7HmoMVyOGCjd0W7vCdYYJMlkukTkh_lK0
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Assisted Solution

by:Eirman
Eirman earned 100 total points
ID: 40468933
You can do a genuinely free course in accountancy (and many other topics) with Alison.
http://alison.com/learn/accounting

This is also a great free resource
http://accounting-simplified.com/double-entry-accounting.html
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Accepted Solution

by:
John Hurst earned 400 total points
ID: 40468951
Let me get you going a bit because there are some holes above.

1. Set up a Family Balance Sheet. At the start, Land is an asset worth 100,000. Equity also totals 100,000 and is split into Equity subaccounts as per above.

2. There must be a Family Bank Account (maybe it is zero at the beginning).

3. Alex deposits 66,000 in the Bank (writes a cheque to the Family). The other side of that entry is Alex equity account which is now 96,000.

So far the above hangs together.

Now, Alex sweat equity is worthless unless he can bill the family and be paid (not likely). So it is not worth anything except when you reappraise the developed Land, Alex (and the others) will see an increase in their equity accounts.


4. Cash is spent to develop the Land so now 66,000 is withdrawn from the bank (paid to vendors) and the other side of that entry is an increase in Land (now 166,000).

5. There is no such thing as a "capital expense" account. There is capital (asset) and expenses (reduction of equity).

6. Revaluation of developed land:  Just an entry:  Debit Land 134,000, Credit Alex, John and Anna how you wish totaling 134,000. Remember Alex put in 66,000 above and that is part of the total 300,000.

You need to draw up a Balance Sheet on a piece of paper (I did that here using T-accounts), consider what accounts you need (Bank, Property, Accounts Receivable (maybe), Accounts Payable on the other side, Equity Accounts.  You need enough accounts to enter all the pieces above and make sure any debit entry (asset) has a corresponding credit entry (usually liability).

You probably need to read a basic Accounting 101 book to help get started.

If you need to hire someone, you are best to do that locally.
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Author Comment

by:xenium
ID: 40469015
Eirman, thanks a lot for the links I will read through these.

hi John, thanks a lot for the feedback, which is very useful to avoid me going too far down the wrong path!

Re your point of a "Family Bank Account" this is virtual i assume, since there is no actual family bank account as yet (there maybe in the future) If so are the first transactions for my step 2 as follows?

Debit 66k: Family bank account
Credit 66k: Alex's equity account

Debit 66k: Property asset account
Credit 66k: Family bank account

Re the "sweat equity" i need some way to account for this as a debt, and in case i decide to write-off any of it i need a way to do this, can you suggest what the transaction should be?

Very grateful for your help. I am also happy to pay or contribute to a nominated charity based on time spent.

Thanks
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Expert Comment

by:John Hurst
ID: 40469022
Re your point of a "Family Bank Account" this is virtual i assume

You will find in Accounting that a joint entity needs a real bank account. Otherwise there is no way to track things. Reconciled bank accounts are key to a ledger of any kind.

Re the "sweat equity" i need some way to account for this as a debt

Alex has to invoice for the value, the ledger records an increase in Property and loan (debt) to Alex.

You can quickly see the need for a real ledger.
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Author Comment

by:xenium
ID: 40469109
hi John, thanks again for your points.

I have a record of which bank transactions are concerning the "Family bank account" so presumably i can copy these to a statement to create the account virtually. There is no real account yet, and it is not practical to have one yet, so meanwhile I need a way to manage this.
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Assisted Solution

by:John Hurst
John Hurst earned 400 total points
ID: 40469126
You can set up a dummy cash account to record these items (laid out as I suggested above). That can get you started. But it can add a bit of complexity because non-entity people (the 3 persons) have to pay for things out of their own banks.

You cannot (readily) cobble an accounting summary from 3 persons bank accounts and personal records.  You need to make up a separate entity to record changes and revaluations. This is different than an estate (which is static and just doles out proceeds). There is no entity needed for most estates but an estate will have a bank account.
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Author Comment

by:xenium
ID: 40469554
Ok so is this just about terminology, if so then would this work:
Debit 66k: Dummy cash account
Credit 66k: Alex's equity account

Debit 66k: Property asset account
Credit 66k: Dummy cash account
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Assisted Solution

by:John Hurst
John Hurst earned 400 total points
ID: 40469561
Yes, that is probably a good way to look at it.
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Author Comment

by:xenium
ID: 40469665
Great thanks. I'm away from my desk just now but will come back to it hopefully tomorrow. Thanks again for your time and attention.
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Author Comment

by:xenium
ID: 40470584
Re the "sweat equity" i need some way to account for this as a debt

Alex has to invoice for the value, the ledger records an increase in Property and loan (debt) to Alex.

Would this be valid:

Debit: 118k Property asset account
Credit: 118k Accounts payable (invoices from Alex)

Thanks again :-)
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Assisted Solution

by:John Hurst
John Hurst earned 400 total points
ID: 40470593
The methodology works. Be careful not to overvalue the time Alex puts in (could overvalue the property that cannot be supported by the market assessment).
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Author Comment

by:xenium
ID: 40471608
Many thanks again. Yes good point, though I would like to make provision for adjustments here. But as far as the example in this question goes, would the following complete the picture for step 3:

Debit 16k: Property asset account (this brings total to the 300k valuation)
Credit 16k: Family member equity accounts (john+anna+alex)

Presumably if there had been a loss (or overvaluing of Alex's time) then this could be adjusted in this step, debiting family equity account(s) and crediting property asset account?
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Assisted Solution

by:John Hurst
John Hurst earned 400 total points
ID: 40471610
To your last point, yes, you can adjust downward but conservative accounting practice is usually better.
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Author Comment

by:xenium
ID: 40471651
Great thanks.

Is there any custom of holding a kind of provisional asset account for managing capital investments and then only transferring this to the property asset account once a formal valuation is completed, or if there is a sale. If so what would such a provisional account usually be called?

Thanks again. Hopefully that should be it for this question!
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Assisted Solution

by:John Hurst
John Hurst earned 400 total points
ID: 40471655
Is there any custom of holding a kind of provisional asset account for managing capital investments and then only transferring this to the property asset account once a formal valuation is completed,

Not really. Capital is capital. You can set up a capital in process account (still capital) and then move to Land, Buildings, Property (or whatever) when complete. But it is all still capital - just in different subaccounts.
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Author Comment

by:xenium
ID: 40471678
Great thanks, that makes sense, since also during construction the sale value may actually drop before it rises at completion. Not sure how this would be accounted for but i'm ok to ignore this effect for this case.
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Assisted Solution

by:John Hurst
John Hurst earned 400 total points
ID: 40471683
Once you have capitalized an asset, changes in valuation go to income/loss. That is why it is important not to overvalue.

This is all in the way of normal accounting .
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Expert Comment

by:John Hurst
ID: 40471954
Thanks again. Hopefully that should be it for this question!

There is lots to learn about accounting, but if this has helped, then we should probably wrap up.
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Author Closing Comment

by:xenium
ID: 40472899
Many thanks for all your help, very useful thankyou.
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Expert Comment

by:John Hurst
ID: 40472904
Thank you and I was very happy to help you.
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