As HOA accounting specialists, we often get questions about the differences in cash and accrual accounting systems. If you’re not familiar with accounting methods, this topic is a great place to start learning. Currently, both cash and accrual accounting methods are widely used by community associations. In some states, however, corporations (including community associations) are required by law to utilize an accrual accounting system.
The basic differences between cash and accrual accounting methods can be explained in the following manner:
Cash Basis of Accounting
Not many people still use a checkbook but think back. A checkbook is a good example of a cash accounting system. That is, you don’t record income until you receive the money in your account. Likewise, you don’t debit your checkbook until you write the check or make payment. The advantage of this system is its simplicity. Most people are familiar with this method and, therefore, are more comfortable using it.
The main disadvantage of cash accounting is that it does not always provide the most accurate reflection of your account. Basically, cash accounting doesn’t see unpaid bills that you know are coming. That’s why this method best fits small associations that always pay their debts on time and don’t have a large number of monthly transactions.
Accrual Basis of Accounting
Accrual accounting is generally accepted as a more accurate system because it records transactions as you incur expenses or earn income instead of when you receive money. This means that, when the landscapers come and service your homeowners association, an accrual system records the expense immediately, as opposed to a cash system, which wouldn’t record this expense until you pay for it.
During the time between performing the service and paying the bill, a cash accounting report would not show the expense. This means that one would think the association has more funds than it actually does. Thus, the accrual accounting method portrays the most accurate financial condition of the association.
How Clark Simson Miller Can Help
Knowing the difference between accrual accounting vs cash accounting is the first step. But, whether your association uses cash, accrual, or a combination of the two systems, the important part is to ensure consistency in your financial recording.
At Clark Simson Miller, we proudly utilize accrual accounting for all of our associations and management companies. Our proprietary software generates custom financial reports that make it easy for board members and homeowners alike to determine the association’s financial health. If your association or management company has been considering or actively pursuing a solution for your accounting needs, we encourage you to contact us. We’d be happy to consult with you to determine if our accounting services can address your community’s needs.