A homeowners association must keep track of its financial transactions to accurately report and assess its financial health. In order to do this, you must have a central location and an organized procedure for recording your finances. Enter the HOA general ledger.
In this artcle:
- What Is a HOA General Ledger?
- The Importance of an HOA General Ledger
- When Is an HOA General Ledger Created?
- The Three Accounting Approaches for Your General Ledger
- What Is Included in an HOA General Ledger?
- HOA General Ledger Is Vital to Financial Success
What Is a HOA General Ledger?
Simply put, the general ledger of an HOA is a chief repository of an organization’s financial data. It uses numbered account titles, taken from a chart of accounts, to track all financial transactions. It serves as a master copy of all accounting information, from assets and liabilities to revenue and expenses.
The Importance of an HOA General Ledger
The foundation of all HOA accounting is the general ledger. Much like your checkbook at home, the HOA general ledger keeps an ongoing record of all transactions made by the community association. It makes the preparation of taxes and reports easy because all the information you need is in one location.
All other HOA financial statements, such as the balance sheet, income statement, and statement of receivables are created based on the ledger. Without a general ledger, it would be impossible to balance your financial position or report your net profit/loss for a given period.
When Is an HOA General Ledger Created?
Unlike all the other financial statements, which are prepared on a monthly, quarterly, or annual basis, the general ledger should be continuously updated. Every time a financial transaction occurs, you must account for it by recording it in the general ledger. Otherwise, your financial reports will come out inaccurate.
At any point in time, you should be able to look at the ledger and see how much money the association currently has in all accounts, as well as where money has moved. If you need to go back and see how much the association spent on landscaping in August three years ago, you should be able to find it in the ledger records.
The Three Accounting Approaches for Your General Ledger
A general ledger is not just a notebook filled with scribbles of your income and expenses. It is much more organized than that and requires a background in accounting. When recording financial transactions, there are three possible ways you can do it. These ways are called accounting methods or the basis of accounting.
The three basic approaches to manage HOA finances are accrual accounting, modified accrual accounting, and cash accounting. There is no right method for every association. Each HOA is different and may find that one method of accounting works better for them than another.
Once you find the approach that works best for your HOA, stick with it. Switching between different approaches can make reviewing financial information in the future confusing and may hinder your board of directors’ ability to make well-informed decisions.
Let’s take a look at the three accounting methods below:
1. Accrual Accounting
This is the most popular and preferred method, as well as the only one in conformity with GAAP. In an accrual approach, you record revenues and expenses when you incur them instead of when money changes hands. This means that communities using this approach will need to maintain two other ledgers for payables and receivables.
For example, when you send out invoices for dues to homeowners, you mark down that money in the receivables ledger. As community members pay their dues, you move the money from the receivables ledger to the general ledger. You should adopt the same process for expenses in a payables ledger. While this may take more effort than other accounting methods, it provides much more detail.
2. Modified Accrual Accounting
This method of accounting is a mixture of the accrual and cash approaches. In modified accrual, you record revenues when you earn them, not when you receive the money. This is similar to the accrual accounting method.
Conversely, you only record expenses when money changes hands, not when you incur them. This is similar to the cash accounting method. If your HOA uses this approach, you will need a separate ledger for receivables. But, you will still document expenses in the general ledger as you disburse money.
3. Cash Accounting
Cash accounting only deals with cash transactions. For both revenues and expenses, you will only report them when you receive or disburse money. Therefore, you document transactions on a single ledger as money exchanges hands.
This is the simplest approach but provides the least amount of detail. It does not give a very accurate snapshot of your HOA’s financial condition since it solely relies on cash transactions. While experts usually don’t recommend this method of accounting, you can still use it for interim reporting purposes or if you find that it suits your needs the best.
What Is Included in an HOA General Ledger?
Since an HOA general ledger is the basis of other sub-ledgers and reports, it must include all financial transactions. Depending on the system of accounting, your HOA may have several ledgers running at the same time. But, no matter the approach, ledgers should include all transactions made by the community association in and out. Each account owned by the HOA should also have its own ledger. Most associations have at least an operational account and a reserve account.
Regularly checking bank statements is a good way to double-check the accuracy of the HOA general ledger. Sometimes, transactions can accidentally go unreported or, in some cases, fraudulent activity may occur. Whenever you receive statements from the bank, make sure all transactions match up between them and the HOA general ledger.
HOA General Ledger Is Vital to Financial Success
Maintaining and understanding the general ledger is important for any homeowners association. It functions as the master repository of all financial transactions on which all other reports are based. If you want your HOA finances to stay accurate, an HOA general ledger is imperative. With such a crucial purpose, you must do your part and diligently keep all records.
Finances can be confusing. It is always helpful to have a professional on your side to make sure everything is being done properly. If you are having trouble keeping up with all the financial documents necessary to properly manage an HOA, call our experts for help.
- Basic HOA Accounting: A Guide For HOA Board Members
- What Is An HOA Income Statement?
- What Are HOA Balance Sheets And How To Review Them?