Which Accounting Method is Recommended for HOAs?

Which Accounting Method is Recommended for HOAs?HOA accounting is a vital part of operating a homeowners association, but it can be very tedious and difficult. Because it is so important, you want to avoid inaccurate or incomplete financial reports at all costs. All board members should be able to analyze financial reports to prepare the association for maintenance, repairs, and homeowner bankruptcy.

Several methods may be used to prepare your HOA’s financial statements. In most states though, associations can choose one of three accounting methods to prepare interim statements: Cash, Accrual, and Modified Accrual.

 

Cash Accounting

This method records payment receipts during the period in which they are received, as opposed to when they are earned. Additionally, the cash basis method does not include Assessments Receivable or Prepaid Assessments accounts on the balance sheet.

Also, the cash accounting method only records expenses when they are paid, not when they are incurred. When using this method, the cash balance is the only balance that decreases, and there is no Accounts Payable account on the balance sheet.

You may be wondering what effect this has on your financial statements. With the cash basis method, amounts for Accounts Payable, Assessments Receivable, and Prepaid Assessments are not reported on your association’s balance sheet. The board may choose to prepare these reports anyway if they would like, but the accuracy of the reports can’t be verified very easily.

 

Accrual Accounting

This method records revenue when it is earned, and expenses when they are incurred, regardless of when money is transferred. Using this, all HOA financial activities are reported on the financial statements, and an asset section of the Balance Sheet called “Assessments Receivable” is reported. This is usually considered the best method because it produces a better overview of the HOA’s financial status than other methods.

The accrual basis method will have a significant effect on your HOA’s financial statements. With this method, transactions are recorded daily, weekly, and monthly as they are incurred, which results in very detailed reports that are automatically generated. For every report, the amounts reported as a liability or asset should equal the total balance on your association’s balance sheet.

The accrual basis of accounting produces three financial reports for your HOA:

  • Accounts Payable. This report lists money owed by your HOA to all vendors.
  • Aged Assessments Receivable. This report lists owners in your community who have not fully paid assessments and other fees by the end of the accounting period, along with details on how much is owed.
  • Prepaid Assessments. This report records all prepaid assessments. All owners who have paid assessments in advance will be listed, along with the amount each owner has prepaid, and the total prepaid balance.

 

Modified Accrual Accounting

Similar to accrual, with this method, revenues are reported when they are earned as opposed to when they are received. Expenses, though, are reported when they are paid as opposed to incurred, which borrows from the cash method of accounting.

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, just like with the accrual basis method. Modified accrual is a bit different than accrual though. For example, if unpaid invoices are reported under Accounts Payable, the amounts will be different than those that are recorded on the balance sheet because these expenses are recorded using the cash method.

 

Which Accounting Method is Recommended for HOAs?

In most states, you can choose between cash, accrual, and modified accrual accounting. To confirm what your state allows, check your state’s law governing HOA accounting. Generally, we recommend that you go with the accrual method, because it usually allowed in most states, and produces the most comprehensive overview of your HOA’s financial status.

 

How Clark Simson Miller Can Help You Manage Your HOA Finances

Dealing with your HOA’s financials can be tough. Even if you have a solid understanding of accounting principles, it still helps to get professional assistance.

That’s where Clark Simson Miller comes in! We offer remote management, accounting, and financial services for community associations of all sizes within the United States. At CSM, our main goal is to ensure the financial strength and stability of your community.

To learn more about how CSM can improve your community, contact us online or give us a call at (865) 315-7505.