Understanding Homeowners Association Accounting – HOA Accounting

If you are a member on the board of an HOA, then HOA accounting becomes a financial obligation for you. You will need to take responsibility for the accuracy of the financial statements and reports of the association.

HOA can be managed by a company, or be self-managed.

How to Analyze HOA Financial Reports?

As a board member of an HOA, there are certain points you need to consider when you undertake HOA accounting. Here are the financial statements and what you need to analyze each statement:

Balance Sheet

Like any other entity, HOA accounting begins with the balance sheet. You will determine the financial position of the HOA after analyzing the balance sheet.

The net worth, or assets minus liabilities, should be reflected in the operating fund. Assets include the members’ dues, cash, net insurance balance, liabilities which include the dues of the HOA.

Insurance is paid in advance and capitalized on the balance sheet. Insurance used every month is treated as an expense and deducted from the original insurance value every month.

The net worth or equity is the sum of past retained earnings and net income for the current year.

Income and Expense Statement

This is an important document when it comes to HOA accounting. You can analyze the cash flow problems if any, by analyzing the income and expenditure. Deviation from the budget can be checked on a month-to-month or yearly basis.

General Ledger

All financial transactions relating to the HOA are routed through the general ledger. While carrying out HOA accounting, this ledger gives you a complete snapshot of all financial transactions in order of date.

Cash Disbursements Ledger

Any irregularities in HOA accounting can be detected through this document. Checks issued to creditors, defaults, expense details, date and amount of the check, and budget code number can be found here.

Accounts Payable Report

An important document in HOA accounting, the accounts payable report gives a complete picture of the pending expenses and payment obligations for the next month.

Audit of HOA Accounts

Financial statements for the next year should be prepared based on the HOA financials of the previous year. The next step in HOA accounting is the HOA audit. Cash flows beyond a certain limit need an audit by HOA staff or a CPA or certified public accountant.

The following reports are prepared by the CPA/accounting firm for audit in HOA accounting –

Compilation

The CPA/accounting firm will compile the financial accounts for HOA accounting. This is a no assurance report; they will not guarantee the accuracy of the financials.

Review

This limited assurance report in HOA accounting means material modifications are not required. The CPA/accounting firm compiles and analyzes the reports.

Audit

This is a comprehensive positive report which provides full verification and guarantees the accuracy of the financials.

Management of Bank Accounts and Assets

Reporting along with management of bank accounts and assets, ensures complete protection of the HOA assets and are essential to ensure complete HOA accounting.

The following process should be followed:

• Deposit funds into HOA account with entry by receivables department
• The community manager should check the accuracy of invoices before payment is made
• Invoice to be entered into accounting software before the issue of checks
• Review checks and opening of item payable reports after which the signature is authorized
• Finance Department examines bank statement for checks and deposits to ensure accuracy and consistency

Important decisions regarding the HOA accounts can be taken by the association if these checks and balances are present.

Handling an HOA Bankruptcy

In spite of all the processes followed in HOA accounting, bankruptcy is a possibility.

Here are the steps to recover the dues from a homeowner in the event of a bankruptcy:

Consultation

Bankruptcy laws protect homeowners, so a consultation with an attorney and management company is important.

Collections Before Petition

A homeowner’s previous dues cannot be collected normally on the declaration of bankruptcy; a bankruptcy court has to be approached.

Access to Amenities

The member’s access to amenities cannot be blocked.

Respect Reputation

The plight of the bankrupt homeowner should not be discussed with other members.

Ensuring Success of an HOA

An HOA needs an effective HOA accounting system to run smoothly, and for this, the financials must be carefully monitored. You can either manage it yourself or hire a specialized accounting firm that understands Homeowners Association accounting needs.

About

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