Why Accrual Accounting Is the Best HOA Accounting Method HOAM

Because of the timing of reporting revenues and expenses, account titles such as “Assessments Receivable” and “Accounts Payable” appear on the Balance Sheet. This gives you a better understanding of your association’s current financial standing. While the modified accrual method is less complex than the accrual method, the main downside is it does not always accurately match all expenses and income in the fiscal month in question. Because expenses follow a cash basis, monthly reports may mislead associations.

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If you are having trouble preparing community financial statements, the professionals at CSM are standing by to answer all your questions. We have years of experience working with thousands of residents across the United States. A majority of experts and accountants agree that the Accrual Basis is the best accounting method to use.

What Is HOA Accrual Accounting?

Still, it’s important to be considerate of the bankrupt homeowner. Understand their situation and never reveal the status of their financial health to other homeowners in the community. It’s also not recommended to restrict their access to amenities or shut off their utilities during a trying period in their life. When a homeowner declares bankruptcy, the first thing your HOA board should do is check with your attorney or management company. Keep in mind that there are certain bankruptcy laws that protect bankrupt homeowners.

1. Not all expenses take place every year, but you should still plan for them to be categorized under the same account regardless of when they occur.
2. HOAs are subject to tax obligations, and proper accounting services ensure that these obligations are met promptly and accurately.
3. However it is not designed for HOA or Condos and does not offer online functionality for owners to make payments or see community documents.
4. It is a good idea to keep detailed records anyways as they will be extremely beneficial for all other aspects of homeowner’s association management.

Why Accrual Accounting for HOAs Is the Best

With this report, you can determine what your expense obligations are for the period and manage your money more wisely. Similarly, you will only record expenses once you actually pay for them as opposed to when you incur them. Using this method, you will not use any payable account titles such as Accounts Payable or Notes Payable.

The HOA board must review HOA finances for reserve and operating expenses. Because the budget must follow the accrual basis, financial statements should also follow the accrual basis. Some have their own laws that dictate what homeowners associations can and can’t use. For instance, even though there are three accounting methods, California law directs that HOAs should use the Accrual Basis when preparing their pro forma operating budget.

Using the modified accrual basis method, the association reports revenues when it earns them, just as with the accrual basis. This means the association reports them as it pays for them, not when it incurs them. Cash accounting dictates that you should record all revenues and expenses as money moves. In this case, you would only record a revenue or expense account when you have either received (revenue) or paid (expense) money for it. When using accrual accounting for HOAs, you record all of the association’s financial activities on the HOA financial statements.

This accounting method frequently uses Cash as an accounting entry, increasing when you receive income. It does not, however, use account titles such as Prepaid Assessments or Assessments Receivable. Again, this is due to the nature of the method wherein you only report income once you receive cash. The California Civil Code has many requirements for homeowners association interim financial statements. Timely financial reports are a tool to control association funds.

If you have an HOA management company, they may offer audits as part of their HOA accounting services. The HOA balance sheet compares your association’s assets against your liabilities and owner’s equity. It gives you a complete look at your HOA’s net worth, including how much money you have in your bank account. Poor HOA financial management can lead to a number of possible consequences both for the HOA and its board.

This results in an automatic generation of very detailed reports. For every report, the total balance must agree with the amounts reported as a liability or asset on the association’s Balance Sheet. The Balance Sheet should have Aged Assessments Receivable as an asset with Accounts Payable and Prepaid Assessments as liabilities until the payment of the amounts. Accurate and regular financial statements are the foundation of sound HOA accounting. These statements typically include the income statement, balance sheet, and cash flow statement, providing a comprehensive overview of the association’s financial health.

You will know how much you are spending on a given expense which will allow you to make a decision on whether or not to cut back on it the following period. Ever feel like your association budget would be just fine if it didn’t have to deal with unit owners that didn’t pay on time? When some people don’t pay it can cause a lot of stress on your community’s budget.

The accrual basis of accounting is generally recommended for homeowners associations as it meets the requirements of the California Civil Code. With the accrual basis, all revenue and expenses appear in the HOA’s Income Statement and amounts are comparable to the budget. When using modified accrual accounting, it is important to understand how your financial statements will turn out. With the modified accrual basis method, the amounts on the balance sheet will equal the amounts for Prepaid Assessments and Assessments Receivable. The accrual basis method will have a significant effect on your HOA’s financial statements. With this method, you record transactions on a monthly, weekly, and daily basis as you incur them.

We’ll help you create a budget every year and we’ll provide your HOA with a monthly financial report. This gives your HOA an even better idea of your neighborhood’s financial situation. That means your HOA can plan events and maintenance with confidence. On the management side, we’re here to help your neighborhood achieve its goals.