In Depth Look At Homeowners Association Accounting

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 understanding how much money is coming into and going out of your homeowners association’s accounts.

 

1. 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 the insurance that’s unused, and liabilities.

The balance sheet includes insurance because it’s usually paid for in advance and then capitalized on the report. 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, you will add that amount to January’s balance sheet as the policy value. Every month, you will tag $100 of that amount as an expense and the value will go down by $100.

Liabilities refer to the amount of money that your homeowners association owes, like if you have an unpaid water bill or a loan 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. That will give you your HOA’s cumulative retention of earnings.

 

2. 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 shows your HOA’s spending compared to the budget for that 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 whether to tweak any categories and also plan for future expenses.

 

3. General Ledger

This report has the account record for every transaction in numerical order, referred to as 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.

 

4. Cash Disbursements Ledger

This report, also called the check register, shows board members the HOA’s written checks. The register has information about the check addressee, the check number, the date of the check, the invoice number, the budget code number, the expense description, the accounts payable report, and the account delinquency report.

 

5. 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 HOA 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.

 

1. 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.

 

2. 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.

 

3. 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.

Every 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.

You can then enter invoices into the accounting software before issuing the checks. After this, the reviewing of invoices and open item payable reports takes place before authorizing a signature.

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, which a CPA will perform. 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, it requires extreme measures. Your homeowners association will need to figure out how it will obtain the dues a homeowner owes after claiming bankruptcy. Follow the tips below:

• Consultation. The first thing the board should do is discuss the issue with the management company and attorney. When a homeowner declares bankruptcy, the bankruptcy laws and court protects him. 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.
• No Pre-Petition Collections. 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. A bankruptcy court may be required to collect pre-petition amounts.
• Retain Access to Amenities. Some HOAs might want to 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.
• Keep It Private. Make sure to remain respectful of the homeowner during the bankruptcy process. Your association should remain kind and helpful whenever possible. The board of directors 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.

 

HOA Accounting and Beyond

Homeowners association accounting is a key part of HOA management. No organization can work smoothly without the proper management of its financials. Your HOA is the same. If you want to have a prosperous and successful association, master these aspects of accounting.

Alternatively, if you want someone to share the workload with you, consider hiring a remote HOA management company. In that case, keep us in mind.

 

RELATED ARTICLES:

• Basic HOA Accounting: A Guide For HOA Board Members
• The Best HOA Accounting Method: Cash, Accrual, Or Modified Accrual?
• 6 Practical Reasons Why You Should Outsource HOA Accounting