One of the trickiest parts of administering a homeowners association (HOA) community is financial accounting. Serving on the board of an HOA comes with tremendous financial responsibility. Yet, many board members fail to realize the importance of their oversight.
When an urgent financial matter emerges, this poses a serious challenge. Becoming acquainted with all areas of HOA Accounting will help you accomplish your duties in an HOA more effectively.
The organization and operation of a homeowners association are quite similar to that of any other type of corporation.
A homeowners association does not intend to generate profits, although it does generate income and incur expenses. The homeowners association board must safeguard the assets and handle the association’s funds. You must employ sound accounting and management practices to keep the HOA in excellent financial standing,
There are a variety of potential outcomes for the HOA and the board if the association’s finances are managed poorly. If the books aren’t kept properly, for instance, the HOA’s finances could collapse. It’s possible that if the records are erroneous, you might overspend and make poor financial choices.
Inadequate funds are yet another risk associated with improper accounting for homeowners associations. If you don’t keep an eye on your spending, the HOA’s funds could dry up quickly, leading to financial turmoil and legal consequences for the community members.
That’s why it’s critical to analyze and interpret these records to have your homeowners’ association ready for insolvency, upkeep, and maintenance of the common spaces. Additionally, it prevents board members and employees from engaging in fraudulent financial practices.
What Should Be the Preferred Basis of Accounting for Homeowners Association?
Associations can choose from the cash basis, accrual basis, or modified accrual basis systems when it comes to accounting. Your HOA’s income and expenditures must be recorded at the appropriate times in accordance with these procedures. But which one is best for your HOA?
Accrual basis is widely regarded as the superior accounting system by professionals and accountants alike. When using the accrual basis of accounting, transactions (earnings and expenditures) get recorded and documented as soon as they are incurred. Your financial accounts reflect the following new account titles: Assessments Receivable and Accounts Payable.
Digging Deep into the HOA Financial Statements
HOA management firms often provide monthly financial reports, and you must pay great attention to these statistics. In the case of a self-managed HOA, the treasurer will be responsible for generating and filing these reports.
Your HOA must submit several financial reports each month in accordance with generally accepted accounting principles. These include:
1. Balance Sheet
The balance sheet for a homeowners’ association lists the assets, liabilities, and equity of the community as a whole. The HOA’s bank balance and other financial information are displayed here in full detail.
The name of this statement comes from its overarching principle: maintaining a zero-sum balance sheet. It means that your equity and liabilities should balance out with the assets.
2. General Ledger
All of your HOA’s financial transactions should be recorded in the general ledger, in the correct sequence according to the HOA chart of accounts, and in chronological order, according to the date the transaction was recorded. It serves as the core of all the financial statements.
3. Income Statement
This report contains the actual expenses incurred for the month, in contrast to the budgeted figure. It also indicates the gap between these two amounts.
Moreover, this report accounts for the year-to-date numbers. Altogether, this report presents a glimpse of the financial standing of your HOA, both monthly and annually.
4. Accounts Payable Report
This is a comprehensive report for all your HOA bills and other payables. Put another way, it includes all you owe but have yet to pay – your financial obligations or unpaid debt.
The receivable equivalent of this report is the account delinquency report, which details all past-due payments owed to the organization.
5. Cash Disbursements Ledger
A cash disbursements ledger details all the checks the association issued during the time frame in question.
This report, also known as a check register, details specifics about each check written, including the payee, the date written, and the nature of the expenditure. Likewise, the invoices, chart of accounts, and check numbers should all be listed.
HOA Bank Account and Asset Management
Homeowners’ association accounting relies heavily on reporting. However, this is of little use if the community’s funds, inclusive of assets and bank accounts, are mismanaged.
The management of a community should employ a system of checks and balances to keep the association’s assets safe from the effects of human error and theft.
The receivables division should keep track of the daily deposits of association funds into the bank account of the HOA. Before making any payments, the community manager must verify the accuracy of the invoices and authorize the associated work.
Conclusion
Knowing and understanding these essential financial fundamentals and procedures will help you better preserve your community’s funds and fulfil your fiduciary responsibilities.
In particular, when it pertains to homeowners and the fair management of financial information, you should let integrity and accountability inform your decisions.
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