HOAs cannot operate without revenue. It’s as simple as that. Good accounting is critical to the health and happiness of every HOA development.
Managing a multi-million dollar budget is not so simple, however, especially if none of your board members have an accounting background. Accounting can be quite stressful for anyone to navigate, and it’s an ongoing responsibility that requires significant patience and exceptional organization.
HOAs must keep track of cash coming in and out, pay bills, monitor the costs of long-term projects, budget, and plan for the future, which is why it is so important to have a reliable accounting system in place.
An accounting Excel template may be very useful to HOAs. Accounting software is another excellent option. However, with so much to do and so little room for error, inexperienced boards may consider requesting help from a property manager, accountant or bookkeeper.
Click here to download our HOA accounting excel template
Below you will learn about some of the critical components of accounting for HOA associations.
Accounting methods
There are numerous ways to manage your HOA’s finances, but you may find one method works better for your community. When setting up your accounting standards, you must first decide which accounting basis to use. A basis of accounting refers to the timing of the recording of financial transactions. There are three core methods: Cash Basis, Accrual Basis, and Modified Accrual Basis.
Cash Basis
When using the Cash Basis, revenues are only reported once actual cash has come in, and expenses are only reported once money leaves the association. The downside to this method is assessments receivable, prepaid assessments, and accounts payable are not reported on the balance sheet.
This basis of accounting is a popular choice, and many HOAs use it. But, this method doesn’t conform with the Generally Accepted Accounting Principles (GAAP), which means the association cannot use this method when preparing official financial statements. It can only be used for interim reporting.
Accrual Basis
Under the Accrual Basis, all financial activities are reported on the HOA’s financial statements. Revenue is recorded when earned, and expenses are documented as soon as they are incurred.
Accrual accounting is generally regarded as the “ideal” accounting method because it gives a more complete picture of the HOA’s financial status. The accrual basis does conform with GAAP, meaning it can be used for official recording and reporting.
Modified Accrual Basis
Sometimes referred to as the Modified Cash Basis, the Modified Accrual Basis of accounting combines the first two methods. This method is unique because revenues must be recorded when earned, but expenses are only recorded when paid.
Using this method, accounts like assessments receivable and prepaid assessments will appear on the balance sheet, but liability accounts such as accounts payable will not appear. Like the Cash Basis, this method doesn’t conform with GAAP and can only be used for interim or unofficial reporting.
Making sense of the numbers
Once you’ve decided on a method for documenting the HOA’s finances, you can work on creating the reports you will use to keep track of different items. Every little detail needs to be written down so that the HOA can analyze the numbers if something doesn’t add up, and so it can share financial information with owners and other relevant parties. Well-maintained reports also enable the HOA to make informed financial decisions for the future. The reports listed below are some of the key accounting documents you will need to manage the association’s finances successfully.
Balance sheet. Think of a balance sheet as a snapshot of the HOA’s financial standing at a specific moment in time. It will show how much money is currently in the association’s bank accounts and compare assets to liabilities. An HOA balance sheet lists items like insurance payments, HOA fees, prepaid expenses, petty cash, bills, compounded interest, and any equity in the HOA’s reserve accounts.
A balance sheet gives you a look at your association’s net worth. To figure this out, add your assets and liabilities together. The number you get is the HOA’s equity.
General ledger. A general ledger is a list of the association’s financial transactions. It lists the transactions numerically and by date. If you use Excel, or accounting software, you may also be able to organize this report by income/expense categories, or other variables. Having an up-to-date general ledger is helpful because it allows anyone with permission to see detailed information about specific transactions.
Statements of income and expenses. Statements of income and expenses show the HOA’s financial transactions during a specific timeframe, usually for a month at a time. It also tells you if the association spent more money than it brought in. This report should include year-to-date figures so that you can easily figure out the HOA’s financial standing for both the month, and the year. The board can use the report to compare actual expenses incurred to those laid out in the budget. Overspending can quickly be identified, and solutions can be implemented before the financial issue becomes worse.
Cheque register. Also known as a cash disbursement ledger, this document records money flowing out of the association. It gives you a comprehensive and up-to-date look at expenditures, including cash transactions and written cheques.
For cash transactions, the date, payee, amount, and description of the expense must be recorded. For cheques, the date, cheque number, payee, amount, the invoice number, and description of the expense is required. An accounts payable report and accounts delinquency report should also accompany the ledger.
Accounts payable. This report tracks all of the HOA’s unpaid expenses. The report generally lists all of the vendors owed, payment terms, and how much is due. Invoices that are not yet due, or work that a vendor hasn’t completed, should be included here. The accounts payable list allows the board to anticipate how much money will be paid out in the future.
Annual audits. Most CC&Rs require an annual financial audit, but check your governing documents to see what they say. Even if the documents don’t specify an audit, it’s highly recommended that HOAs conduct an audit every year, especially if your association has a large cash flow.
An audit simply means a review of your association’s financials. Audits require an outside opinion, and it is recommended that a Certified Public Accountant conduct the audit. They will check the records to ensure they comply with basic accounting principles, verify transactions to confirm the accuracy, and identify errors or inaccuracies.
Tips for good financial management
If you’re feeling uncertain about accounting, don’t hesitate to seek advice or help from a professional. On that note, these tips may help you manage the HOA’s finances more efficiently, even if you aren’t directly responsible for crunching all of the numbers.
- Add and deduct funds from the proper accounts. It sounds like common sense, but it’s not hard to see why an association might be tempted to take money from reserve funds or another account if it is under financial strain.
- The operating fund is for regular maintenance, vendor contracts, and similar expenses. Don’t use this money for other expenses as it can lead to assessments.
- Understand your state law. Make sure you’re following your state’s law; some places may require an HOA to produce reports using a specific method.
- Make sure categories will make sense to others. Be sure income and expense categories will be understood over time. If, for example, you have a volunteer treasurer doing the books, they shouldn’t have to struggle to understand categories.
- Don’t panic if you’re over budget. Going over budget on one or two items won’t break the association. There will always be categories that go over budget, so be prepared to make some adjustments and cut back in other areas, if possible.
Download Template
Download our free HOA Accounting Excel Template
