Important Information About Modified Accrual Accounting
Using Accrual Accounting or Modified Accrual Accounting are two of the most popular forms of accounting methods for HOAs. At first, it can be difficult to master Accrual Accounting or Modified Accrual Accounting for those that do not have prior experience in the accounting sector. To learn more about how to apply Modified Accrual Accounting to your HOA’s books, read and understand the information below:
Benefits of Using Accrual Accounting
Under the Accrual framework, all financial activities of your HOA are reported to the HOA’s financial statements. This is usually determined to be the most efficient accounting method because it paints the clearest picture of your HOA’s overall financial health than other accounting methods. The Accrual basis, which conforms with the GAAP, means that revenue is recorded the moment it is earned, and expenses are recorded when they are acquired, regardless of when the actual cash is exchanged.
How Revenues & Expenses Are Calculated with Accrual Accounting
Revenues are reported when they are earned, not when they are received. What this means is that an asset titled “Assessments Receivable” is reported on the balance sheet. As the payments begin to be received, they increase the HOA’s overall cash balance while either reducing the Assessments Receivable or increasing prepaid assessments. An example of this can be seen from when the member assessments are reported as revenues when they are charged to the members, which makes them earned by the HOA on the first day of the month.
Expenses are reported when they are incurred, not when they are paid. A liability titled “Accounts Payable” is reported on the Balance Sheet and as soon as these various items are paid, the HOAs cash balance and Accounts Payable are reduced. An example of this is when the costs of various services that are provided to the association are reported as expenses when the services have been successfully provided.
What Is the Difference Between Accrual Accounting & Modified Accrual Accounting?
Modified Accrual Accounting is a bit different than the Accrual one because it is not formally adopted by the GAAP, but it has been codified in Civil Code Section 5200. Modified Accrual Accounting is a combination of the Accrual and Cash Basis. For Revenues, the HOA reports them when they are earned, not when they are received. For Revenues, the timing is the same process as traditional Accrual Accounting. For Expenses, the HOA reports them when they are paid, not when they are incurred, and the timing is the same as the Cash Basis.
Modified Accrual Accounting the amounts for Assessments Receivable and Prepaid Assessments will correspond to the amounts on the Balance Sheet, which is the same as the Accrual Basis. However, the difference is in the number of unpaid invoices in the Accounts Payable Report that would not be on the Balance Sheet because these expenses are recorded on a Cash Basis versus an Accrual Basis.
Should I Outsource Accounting for My HOA?
HOAs have to be extra careful about their accounting practices to avoid unnecessary audits or substantial taxation fees. Previously, there has been a great deal of corruption with HOA funds, which is why stricter regulations have been created to crack down on dishonest HOAs. HOAs normally are quite burdened when they have to manage these practices. It is usually best to consider outsourcing accounting needs because it will free up time for HOA management to focus on other important aspects of their community. Be sure to carefully research which company you would like to handle your HOA’s accounting needs. Typically, it is best to find a company that can help your HOA with many of its management needs to provide better service to your community members. If you take the time to make this transition, the approval of your HOA will increase dramatically with your residents.
How Clark Simson Miller Can Help
Clark Simson Miller has a great deal of experience in helping plan out Modified Accrual Accounting in communities all over the United States. To learn more about how Clark Simson Miller can help, give us a call at (865) 315-7505 or contact us online.