Homeowners Associations (HOA) have many responsibilities when it comes to protecting the assets of their community. Having accounting standards comes along with that HOA engagement.
As a board member, HOA members have the duty of planning the financial course of the organization. In any form of accounting, there is a skill in balancing the budget and ensuring that operating and reserve funds are managed appropriately to keep everyone’s investment protected.
Don’t be the person whose accounting standards are based on cheesy quotes on money like:
“Money doesn’t grow on trees.”
“You have to spend money to make money.”.
“The best things in life are free.”
“A penny saved is a penny earned.”
“You can’t take it with you.”
HOA board members need a detailed plan for their financial future to prevent disaster. Financial obligations can include maintenance, repairs, and bankruptcy. So what are the standards of preparing your HOA interim (monthly, quarterly and annual) statements? Most states regulate that you use one of three basis of accounting.
This standard accounting method records transactions when money exchanges are made between two parties. Revenues are reported when they are received, and all expenses are noted when paid, not when they are incurred. With cash basis, sums for Accounts Payable, fees receivable, and prepaid estimates are not reported on the HOA’s balance sheet.
More than the other two methods, the Accrual Basis is recognized as the superior method of accounting for your HOA due to the fact it provides an overall picture of the financial health and stability of your organization. Three reports are produced using the Accrual Basis:
- Accounts Payable.
- Aged Assessments Receivable.
- Prepaid Assessments
HOA transactions are reported daily, weekly, and monthly. In statements, the total balance must coincide with the amounts reported as a liability or asset on the HOA’s balance sheet.
Modified Accrual Basis
Modified Accrual is a mixture of Accrual and Cash Basis methods. With this HOA accounting standard values for Prepaid Assessments and Assessments Receivable will be the same on the balance sheet, but the amount of the unpaid invoices in the Accounts Payable Report would not be on the Balance Sheet. Those expenses are listed on the Cash Basis.
So what accounting standard should you use for your HOA?
The most popular method of the three is the Cash Basis method. Think of the Cash method like a checking account. Money comes in, money goes out, and everything is recorded accordingly. While Cash Basis is easy to understand and frank, although it has blind spots in respects to unpaid bills or dues from HOA members, this creates an unrealistic view of the organization’s finances.
The modified method has comparable issues when it comes to the accuracy of the HOA’s economic future because the combined process involves using cash, and exactness is one of the prominent goals when it comes to association accounting.
Generally, even though a tad bit more confusing, the Accrual Basis method is usually the healthiest accounting standard to use for your HOA. Regulations vary from state to state, so checking with civil codes is also imperative in the process.