Among the many financial statements of an organization, the income statement is one of the most essential. But, what does an HOA income statement include? And what purpose does it serve a homeowners association? Let’s find out.
What Is an HOA Income Statement?
To put it simply, an HOA income statement shows the revenues and expenses of a homeowners association for a specified time period. It shows a breakdown of an HOA’s revenues, as well as the sources of those revenues. It also depicts all the expenses an HOA incurred during the given duration. Deduct the total expenses from the total revenues to arrive at your organization’s net profit or loss.
Do not let this confuse you, though. An income statement is the same as a profit and loss statement or a statement of earnings. Others even refer to it as a statement of revenues and expenses. Organizations use these terms interchangeably, but they mean the same thing.
The Importance of an HOA Income Statement
Unlike a balance sheet, which shows a quick snapshot of HOA finances at a certain point, the income statement shows financial information over a period of time. Usually, the period of time is the rate at which you prepare your financial documents, whether it be monthly, quarterly, or annually.
Among the many financial statements available, experts consider the income statement as one of the most important. After all, this document shows the financial direction of the community association, whether that is positive or negative. It gives you a good grasp of the association’s recent finances. With this statement, you can determine whether your HOA is operating at a profit or loss. You can then use this information to influence your future financial decisions.
What Is Included in an HOA Income Statement?
There are four items that should be included in an income statement: Gross profit, operational expenses, gains and losses unrelated to operational costs, and net income. Let’s break them down one by one.
1. Gross Profit
Gross profit is all the money your HOA made over the time period. This does not take expenses into account yet. Therefore, it only shows your revenues before the deduction of costs. If you submit financial documents monthly, your gross profit should encompass all the funds raised within that month. That should include any dues, fees, charges, sales, or donations collected.
2. Operational Expenses
Operational expenses are the fees your homeowners association pays on a regular basis. This includes expenses like property maintenance, pool cleaning, landscaping, etc. Anything that is a recurring charge necessary to keep the community up and running should fall under this category.
3. Gains and Losses
All other one-time expenses unrelated to operational costs belong to this category. Because the homeowners association income statement shows finances over a certain period of time, you must report any extra expenses. If the community playground needed new mulch in March, that expense should appear in that month’s income statement, even if it means the association did not make as much money in March on paper.
4. Net Income
Finally, net income is the result of taking gross profit and subtracting all expenses for the period. This is the magic number that the entire report is based on. If your report comes out showing a positive net income, then your association did well and you can put some money in the reserves. If your net profit came out negative, then you should take a deeper look into your finances and see where you can make any improvements.
Tips When Creating Your HOA Income Statement
It is tough to prepare financial statements when you don’t have the experience or knowledge. While the income statement is fairly simple (perhaps the simplest) to draw up, people still make mistakes. Some of these mistakes are small and insignificant, but others are grave and detrimental. To help you out, here are three tips to follow when drafting your HOA income statement:
1. Be as Detailed as Possible
When preparing your income statement, you must break down all categories and be as detailed as possible. Break down your gross profit into dues, fees, and any other source of income for that time period. Similarly, break down your operational expenses into landscaping, pool cleaning, etc. The more detail included in any financial document, the more insight it will give to the association board of directors leading to better decision making and financial planning.
2. Record All Financial Transactions
In order to get an accurate view of your HOA’s financial health, you must take everything into account. Make sure to diligently record all financial transactions, big or small. If you miss an expense and fail to report it, it could lead you to the wrong conclusion.
You might think your HOA is making money when, in truth, you are way over budget. Conversely, if you fail to report some revenues, you might unnecessarily increase HOA dues to make up for the loss. Operating under a misapprehension could result in some serious consequences.
3. Consult Professionals
Although it is part of an HOA board’s responsibility to prepare financial statements, not everyone is equipped with the expertise and knowledge to do so. These reports require a background in accounting or financial management. As most boards are comprised of volunteers with full-time jobs and families, this task can be a challenge.
Thankfully, there are HOA financial management services that can offer help. These companies specialize in handling HOA finances, bookkeeping, accounting, and creating financial reports. If you want your income statement done accurately and correctly, it is best to consult with a professional or outsource the duty altogether.
Let the Income Statement Guide Your HOA
The HOA income statement gives you a glimpse of recent revenues and expenses. By referring to it, you can pinpoint areas of improvement and make informed financial decisions. While the income statement is essential, its purpose is marred by incompetent preparation. When you create your statement of profit and loss, make sure to include all financial transactions and go into the specifics.
If you are still unsure about how to create a proper HOA income statement, you will benefit from our services. Keep in mind that we are just one call away.
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