Everyone has an individual way of doing things, and when it comes to financial records this is especially true. Some landlords store receipts in a shoebox, others have detailed files and books that cross reference all their records. And, of course, there are those who fall somewhere in between. You'll have to find the system that works best for you. But here are some suggestions that you may find helpful.

Spend a little time at the end of each month filing receipts, logging expenses and income, and recording other pertinent data. Then you'll always know where you stand financially and have good information on which to make sound business decisions. Appendix B includes several worksheets to help you organize and record financial information.

Expense and Payment Records

Keep all receipts, cancelled checks, and checkbook registers or stubs that pertain to your property. You want all your bills, invoices, credit card statements, and itemized receipts for supplies, services, and repairs. That way you'll know, and be able to prove, exactly how much you are spending each year.

Staple receipts together by category and month. File them chronologically in a file folder or envelope. At the start of the new year, put all receipts for the previous year into a large envelope.

Documenting invoices, a procedure used by some large companies, might simplify things for you, too. As you pay your bills, write down the check number on the invoice or, if you paid in cash, put a checkmark next to the dollar amount. Then code the receipt by writing down the ledger sheet category, such as phone or advertising, to which it will be applied. You'll never have to wonder, later, whether or not you paid the bill and then forgot to enter it in your records. You'll know, too, exactly when your payment went out.

Filling Out a Ledger Sheet

Your next task is to write down expenses on a ledger sheet, also known as a rental expense allocation report. Dedicate each row to a separate expense category. Include a column for depreciable expenses and another for deductible expenses. See Appendix B for a sample form to see what categories are commonly included. Some landlords will add additional categories for other fees, such as telephone or Internet service if the tenants don't pay for this themselves. Create a customized ledger sheet for your property, using a computer or paper, and keep records faithfully.

If you pay for everything by check, the checkbook register will confirm entries on your ledger. But sometimes it's easier to pay by cash or credit card. Keep receipts and monthly credit card statements as backup. If you want to use a credit card, get one specifically for your rental business. Many credit card companies send out a summary statement at the end of the year and that makes it easier to see your expense breakdown.

Every time you pay a bill, enter it on the ledger sheet. Each horizontal line should be devoted to one bill. Write down who was paid, the amount paid, the date paid, how it was paid (check, cash, or credit card), and what it was for. If you paid by check, write down the check number for easy cross-referencing with your checkbook register. Also note whether an item is depreciable or deductible.

Monthly Income Record

This sheet, with a column for each of the twelve months, will be used for years to remind you exactly when you last increased rent or any of the fees paid by your tenant. You will simply record the amount of rent you collect each month. The first year or two it might seem unnecessary since you have only one rental unit, but after you've been a landlord for numerous years, you will appreciate having a handy reference that allows you to summarize yearly income and compare one year to another. It also will be useful in determining your cash flow.

Cash Flow Analysis

Cash flow is the money you have left over after you've paid all your expenses. Figuring out your cash flow is the only way you know whether or not you're making a profit. On an income and expense statement, itemize and total all expenses and income for the year (or to date). Subtract your expenses from your income to discover what your cash flow is. This document is similar to the worksheet you use when you prepare your federal income tax return, but much more detailed, and therefore much more useful to landlords or anyone else running a business.

Looking at your cash flow is the only way to determine whether your business is viable or about ready to crash. Everyone in business needs to analyze their cash flow; it's the basis for making sound business decisions. For landlords, that means understanding when they can afford to make capital improvements and whether they can afford to hire someone to do the job.

Depreciation Schedule

Routine expenses such as repairs, supplies, and anything else you need to maintain your property are deductible items on tax returns. You depreciate capital improvements that increase the value of your property; they include such things as appliances, a new roof, yard improvements, and the dwelling itself.

The formulas for depreciation are complicated and subject to frequent changes. You want to use the tax advantages of depreciation, but this is one area in which hiring an accountant can be a big help. Remember that listing a depreciable item as a deductible business expense on your tax returns is a huge mistake; it waves a red flag at those IRS personnel deciding which businesses to audit.