What Are The Standard Financial Statements?
Knowing what the standard financial statements are as well as how these documents represent the movement of money within a homeowner’s association is vital for transparency and accuracy. Homeowners pay their monthly/annual dues, and the last thing they’d want is to be in the dark as to where the funds are being allocated.
While financial reporting is tedious for the volunteers working for the homeowner’s association, the HOA Board of Directors (BOD) and its members should still be able to understand and analyze these documents for accurate financial reporting. At the same time, homeowners will benefit from knowing these financial statements, as well. To get started, here’s a quick guide on the standard financial statements:
1. Balance Sheet
The balance sheet is a financial statement that shows the financial situation of the association, taking into account the assets, liabilities, and equities. The simple formula used is:
Assets = Liabilities + Equity
As the name suggests, the two sides of the equation should be balanced. Otherwise, the bookkeeper must go back and check the books to see what’s causing it to be unbalanced.
Assets are divided into current and noncurrent. Current assets are those items that the association can easily convert into cash within the year. Noncurrent assets work the same way, except they take longer to convert into cash (more than a year). These assets include fixed assets, which are things the association use but cannot sell immediately like the HOA office furniture.
While assets are where the money comes from, liabilities are where the funds are spent on. Simply put, liabilities are expenses that the association needs to pay off. Liabilities are broken down into current and long-term. The current liabilities are expenses the association needs to pay off within a year. Meanwhile, the long-term liabilities are obligations that can be settled even after a year.
Also known as shareholder equity, this is the amount of money returned to shareholders once the assets are liquidated and when the liabilities are paid off. The formula for this is:
Equity = Assets – Liabilities
In making the balance sheet, items must be correctly classified under assets or liabilities. A simple mistake can cause an unbalance and can even make your finances appear less healthy than it is. Every balance sheet is closed after a year, and if your equity is positive (which means your assets are bigger than your liabilities), that’s good!
2. Income Statement
The income statement is otherwise known as the profit-loss statement. It is the financial report that tallies the association’s profits and losses within an accounting period or a year. Both cash and non-cash gains and losses are recorded here.
Income statements are divided into two components, operating and non-operating. The document will show revenues or total sales. Bookkeepers count and record every sale made, like the tickets sold to the homeowners for the night gala or gate fees for deliveries. The expenses reflect all operating expenses, such as cost of goods, cost of services, rent expenses, bank fees, utilities, salaries for employees, etc. Losses will also include accruals.
Income statements have to be prepared accurately, as well. This financial statement shows profitability, and any inaccuracy can result in unnecessary costs and wrong inventory projections. It may also affect the profitability ratios of the association. After all, some communities need to earn extra money for the benefit of the community, too, like the Father’s Day buffet or Halloween costume party.
3. Cash Flow Statement
A cash flow statement shows how the cash flows, which means the document shows where the money is coming from and where it’s going. While it seems like its purpose is similar to income statements, cash flow statements only work with cash transactions. The cash inflows and outflows come from three financial activities: Operations, Investments, and Financing.
The cash flow statement is a snapshot of the association’s liquidity and solvency. Within the community, the cash flow statement is a gauge of the association’s ability to fulfill upcoming obligations like the salary of employees. The cash flow recorded should be the same as the increase or decrease of cash transactions in the income statement for accurate reporting.
HOA and Financial Management Services
The HOA board members must have a sound understanding of these financial statements, which is integral in understanding how the association’s money is saved and spent and to be able to assess the association’s current financial standing. This will help them make projections and plan for the next financial year.
On the other hand, not all HOA BOD and members are expected to be able to come up with financial reports on their own. This is why homeowners’ associations look for a financial management service provider. There’s no excuse for unbalanced and inaccurate books at the end of every accounting year. Not only will this look bad to the homeowners, but this can lead to homeowners taking legal action.
Clark Simson Miller Can Help You Manage Your HOA Finances
If you’re looking for financial management help to ensure the financial strength and stability of your community, contact the experts at Clark Samson Miller. They’ve worked with numerous communities across the U.S. to help them manage their finances better. You can send an email to firstname.lastname@example.org. For a free quote, give us a call at (865) 315-7505 or contact us online!