California, for instance, requires the use of the accrual basis of accounting when preparing a pro forma operating budget. While both cash and accrual accounting have their merits, many HOAs find that accrual accounting provides a more comprehensive and accurate picture of their financial health. As associations grow and their financial needs become more complex, transitioning to accrual accounting often becomes necessary. Typically, an HOA must prepare and update financial statements every month, with the exception of the general ledger. The general ledger must be updated more regularly (daily or weekly) since it is a record of all financial transactions.

• This means you will only record income once you actually receive the payment as opposed to when you earn it.
• The optimal level of internal control is when no one person has responsibility or access to more than one function of the financial operation.
• This report has the account record for every transaction in numerical order, referred to as the chart of accounts.
• Using the Cash Basis of Accounting, you record income and expenses when money changes hands.
• Financial management is one of the most critical responsibilities of an HOA board.
• All revenues that have been earned and all expenses that have been incurred will be reflected in the Income Statement; therefore, amounts will be comparable to the budget.

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Those in favor of the Cash Basis often argue that many HOA managers and board members are more interested in exactly how much cash was received and disbursed during a financial period. However, this cash flow information can be obtained from the other financial information that should accompany the financial reports. To simplify the cash basis method of accounting, look at the bank statements at the end of each month and you can see how much cash was deposited into the bank.

Doing your own taxes might make you want to curl up into a ball and hide under your desk, so HOA Accounting the thought of filing your HOA’s taxes may bring you to tears. Managing the association’s finances is one of your most important responsibilities as an HOA board member. As a board member, you may opt for either one of these reports annually or not; it really is up to you, as they are not necessarily required. But, having some understanding of these various reports and what they entail will help you make that decision when all is said and done.

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However, this method may not accurately reflect an HOA’s financial health since it doesn’t account for outstanding bills or future expenses. One possible reason for this difference in opinion could be how the HOA handles its finances. And that makes sense – one of the key aspects of running an HOA effectively is proper financial management, including the handling of HOA payments. An integrated accounting and bookkeeping solution is essential for HOA boards looking to streamline financial processes, increase accuracy, and improve homeowner trust. By investing in the right tools, your HOA can eliminate manual errors, enhance financial transparency, and focus on what truly matters—building a strong and well-managed community.

• An audit is an independent examination of an HOA’s financial statements to verify accuracy and compliance.
• You’ll get a no assurance report, which means that the CPA cannot guarantee that the financials are accurate.
• Choosing which basis of accounting to use is the first step towards better financial management.
• The financial statements of an HOA should be made available to the HOA board and the homeowners.

How Often to Prepare Financial Statements

Each accounting method comes with unique advantages with a different effect on HOA finances. Thus, it’s important for board members to understand which method the association will use. HOA accounting is probably one of the most complex, and most important, responsibilities of the association board. Preparing financial reports on a regular basis is important for many reasons. They also promote transparency between the board and members or it can also be a law requirement.

One of the most crucial decisions an HOA board must make is choosing the right accounting method to manage their financial matters and HOA payments. But which accounting method is most common for homeowners association boards? An audit is an independent examination of an HOA’s financial statements to verify accuracy and compliance. Audits are conducted by Certified Public Accountants (CPAs) who specialize in homeowners associations and condominium associations. Unlike the Cash Basis and the Accrual Basis, the Modified Accrual Basis differs in timing when it comes to reporting its revenues and expenses.

It shows your assets, liabilities, equity, expenses, revenue, and gains. You’ll use your general ledger to build the HOA’s financial statements. Understanding the three methods of accounting is the first step toward accurate financial recording. As a board member, it’s your responsibility to report all financial transactions with care and precision. That means choosing the best accounting method for HOAs for all reporting and sticking to it.

• The HOA records income when it receives payments and expenses when it makes payments.
• Though, since HOA accrual accounting is the best, consider amending your governing documents if it asks you to use a different method.
• Do all Board members currently have access to view your operating bank account?
• Conversely, does the HOA have any unpaid bills, and how old are those bills?
• But, as an HOA board member, you should do your part to at least understand the basics of accounting and financial management.
• Ensuring timely and accurate payments while tracking service agreements is essential to maintaining good vendor relationships.
• Newer HOAs or ones with more basic budgets can prepare one every month without much issue.

This means the association reports them as it pays for them, not when it incurs them. When an elected community member self prepares financial statements, make sure that there is a backup of all financial records. It’s helpful to review the HOA financials from the previous year in order to prepare for the following year. Homeowners associations with high cash flows should get an annual audit by either a staff member of the homeowners association’s management company or a CPA. If you opt to hire a CPA, they will provide you with one of three reports. The association will decide which report they want before the CPA starts work.

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It indicates your association’s net worth by subtracting your HOA’s liabilities from your assets. The accountant should compare the amount in the operating fund with the bank statement. You’ll see the association’s assets minus the liabilities, which gives you the net worth. Assets may include cash, amounts owed, remaining values on the insurance that’s unused, and liabilities. Simply put, an HOA audit is a comprehensive analysis of your association’s accounting records, including your financial statements.

Understanding HOA Fees and Special Assessments

It provides a clearer financial picture than cash accounting while avoiding the complexity of full accrual accounting. Some small HOAs prefer this method, but most professionals still recommend the accrual method. For General Ledger bookkeeping, you must record every transaction in numerical order — according to how you ranked them in your Chart of Accounts — and based on the date of occurrence. Every entry must consist of a debit and a credit account, with the total debit amount equaling the total credit amount. This is one of the most important homeowners association accounting rules.

Documents to Keep Permanently

Since you report income and expenses as they occur instead of when money moves, you immediately know how much money you have. Your homeowners association’s equity is the balance of the reserve account. The board of directors will see the retained earnings on the balance sheet, which are calculated with the retained earnings from the previous year and the net income of the current year. If you find it too much of a struggle trying to manage your homeowners association’s finances on your own, it may be time to outsource those services.