In-Depth Look at HOA Accounting

When you’re on the Board of Directors for your homeowners association and you’re involved in HOA accounting, you carry a big financial obligation on your shoulders. If you’re not prepared for the job, the financial reports and records you’ll have to go through, many of which will be inaccurate, can become overwhelming. It’s necessary to analyze and decipher this documentation in order to prepare your homeowners association for bankruptcy, maintenance and repair to the common areas, and financial dishonesty within the board or among employees.

Many board members misunderstand their role when it comes to HOA accounting, which becomes a big problem when there’s an issue that needs to be handled. It’s important to become well-versed in the following accounting aspects.

Understand the Monthly Financial Reports

In order to run a homeowners association, you’ll need to understand proper reporting. It’s necessary to pay attention to the monthly financial reports which you’ll get from the homeowners association management company. If the homeowners association is self-managed, the treasurer will provide you with these reports. You’ll need to record the reports using financial software, such as QuickBooks.

There are certain financial reports you’ll need on a monthly basis, including the balance sheet, statement of income and expense, cash disbursements ledger, and the accounts payable report. The following reports are necessary for understand what money is coming into and going out of your homeowners association’s accounts.

Balance Sheet

The balance sheet report shows you the financial condition of the homeowners association. This report will show you the actual amount of money in the homeowners association’s bank account.

Many board members find balance sheets to be confusing. The balance sheet should always, without exception, balance out. The accountant should compare the amount in the operating fund with the bank statement. You’ll see the association’s assets minus the liabilities, which gives you the net worth. Assets may include cash, amounts owed, remaining values on insurance that’s unused, and liabilities.

HOA AccountingInsurance is included because it’s usually paid for in advance and then capitalized on the balance sheet. As the insurance gets used, the balance of the asset will decrease until there’s nothing left. If your homeowners association gets a year-long policy for $1,200, that amount will be added to January’s balance sheet as the policy value. Every month, $100 of that amount will be expensed and the value will go down by $100.

Liabilities refers to the amount of money that your homeowners association owes, like if you have an unpaid water bill or a loan that was taken out for a project. Liabilities may also include the fee for the homeowners association’s management company.

Your homeowners association’s equity is the balance of the reserve account. The Board of Directors will see the retained earnings on the balance sheet, which are calculated with the retained earnings from the previous year and the net income of the current year. This is considered your homeowners association’s cumulative retention of earnings.

Statement of Income and Expense

This report is one of the most important tools for the homeowners association and community manager. The statement of income and expense report has the amount that was spent for the month, compared to the amount that was budgeted for the month, and the difference between the two amounts. The report also shows the year-to-date numbers. The statement of income and expense report shows a snapshot of the homeowners association’s financial state for both the month and the year. Board members use the report to decide if there are any categories that need to be tweaked and also to plan for future expenses.

General Ledger

This report has the account record for every transaction in numerical order. This is called the chart of accounts. It also has the date order, called the occurrence, of the transactions. This report gives the homeowners association and the community manager information to help them track financial transactions.

Cash Disbursements Ledger

This report, also called the check register, shows board members which checks have been written. The register has information about who the check was written out to, the check number, the date of the check, the invoice number, the budget code number, the expense’s description, the accounts payable report, and the account delinquency report.

Accounts Payable Report

The accounts payable report shows unpaid expenses and tells the homeowners association what expenditure obligations happened within the month. The account delinquency report shows the accounts receivable and a list of the members who are not current on their obligations, like late fees and legal fees.

Homeowners Association Annual Audit

It’s helpful to review the financials from the previous year in order to prepare for the following year. Homeowners associations with high cash flows should get an annual audit by either a staff member of the homeowners association’s management company or a CPA. If you opt to hire a CPA, they will provide you with one of three reports. The association will decide which report they want before the CPA starts work.

Compilation: This is the most basic financial service you could have a CPA do. The CPA will compile the financial records and use basic accounting to make sure the financials were kept correctly. They may take certain steps to correct entries before preparing the report. You’ll get a no assurance report, which means that the CPA cannot guarantee that the financials are accurate.

Review: This includes the same services as a compilation and also has the CPA take an analytical look at the association’s financial records. This is a limited assurance report that guarantees there won’t be any material modification needed.

Audit: This type of report is all-inclusive and includes both verification and substantiation services. The CPA will verify the debtors and creditors on amounts owed and they will also inspect the homeowners association’s inventories. The CPA will also inspect the homeowners association’s contract for mistakes. This report has a positive assurance, meaning that the CPA guarantees that the financial statements are accurate and that your homeowners association is in good financial health.

Managing the Homeowners Association’s Bank Account and Assets

While reporting is an important aspect of homeowners association accounting, it won’t be helpful unless you correctly manage the association’s bank accounts and assets. In order to minimize errors and losses, the community manager should use checks and balances, which will protect the association’s assets.

Homeowner Association AccountingEvery day, association funds should be directly deposited into the homeowners association’s bank account and the receivable department should record the deposits. The community manager should go over invoices to make sure they’re accurate and they should approve invoiced work before payment. Invoices can then be entered into the accounting software and the checks can be issued by accounts payable. The invoices and open item payable report will then be reviewed before a signature is authorized. The finance department will then get the bank statements and go over the deposits and checks. The finance department’s main goal is to maintain an accurate, consistent record of the association’s financial transactions.

When there’s a system of checks and balances, the association is able to make important decisions regarding homeowner accounts. The community manager should suggest an annual review or audit that is performed by a CPA. It’s important for the homeowners association to retain final authorization over replacement and transactions.

Homeowner Bankruptcy

No matter how many positive steps you can take toward protecting your homeowners associations, sometimes bankruptcy is unavoidable. When homeowners fall on hard times, extreme measures must sometimes be taken. Your homeowners association will need to figure out how it will obtain the dues its owed after a homeowner has claimed bankruptcy.

The first thing the board should do is discuss the issue with the management company and attorney. When a homeowner declares bankruptcy, they’re protected by bankruptcy laws and court. If there’s a pending legal action for past due amounts, you’ll want to go over the cases with the management company and attorney.

It’s important for your homeowners association management company to know that you don’t want to continue seeking pre-petition collections. Amounts that were owed before the homeowner filed bankruptcy can’t be collected the normal way at this point. Bankruptcy court may be required to collect pre-petition amounts.

It’s common for a homeowners association to find out if they can turn off the access that members have to amenities while they’re going through the bankruptcy process. It’s best, though, for the association to not turn off this access.

It’s important to remain respectful of the homeowner during the bankruptcy process. Your association should remain kind and helpful whenever possible. The Board of Director should keep the bankruptcy issue private and not discuss it with other homeowners. Bankruptcy is a delicate issue and your association should not take it lightly. If you don’t know how to proceed or if you want to protect the association from legal action, it’s important to talk with a homeowners association lawyer and to get in touch with your homeowners association management company right away. This is the best way to avoid problems in the future.