Accounting Setup for HOAs
Homeowner association boards and their HOA management company face a number of challenges in setting up and managing a cost effective and legally compliant HOA.
What they don’t need during this phase is a poor handling of the board’s financial transactions, producing inaccurate financial reports for HOA planning uses, filing cabinets filled with paper receipts, violation tickets, invoices, and a spreadsheet or calculator that crunches numbers which make no sense.
HOA Accounting Deserves Respect
Accounting is a critical aspect of homeowner association management just as it is in property management. It provides the financial infrastructure for ensuring cash flow, managing finances well and meeting obligations.
While HOA accounting software is used in HOAs now, you still have to make executive decisions and understand why you’re organizing your books to empower your association. It’s more than just financial, but also aids in building business intelligence, complies with laws, along with building member trust and confidence in the HOA.
The Importance of HOA Accounting: “To make a great plan, it is important to have all the information possible. Reliable, consistent, and transparent financial statements not only help the HOA board of directors make well-informed decisions. It also supports community health by allowing all community residents and stakeholders to be a part of the team “– from article on clarksimsonmiller.com
Setting Up your HOA Accounting System
In order to meet member expectations and all legal business requirements, an HOA board must set up its HOA accounting method to ensure accurate financial reporting for the association’s financial activities. The same process is undertaken in any real estate accounting or property management accounting system.
The HOA board is responsible for protecting the HOA’s assets, managing finances properly, meeting obligations such as having funds ready for materials, labor, repairs, and construction projects, and collecting revenues all to keep the association in good financial condition.
The HOA board should use accepted HOA accounting best practices to ensure the association’s finances are done properly to maximize financial insights and avoid trouble.
Of course, if HOA accounting management isn’t set up properly, poor accounting decisions and poor bookkeeping practices may result in financial losses, poor decisions, fines, firings, and even law suits from homeowners. Bad financial management can mean the board can no longer operate, thus the HOA may have to be dissolved.
Setting up to GAAP Rules
It’s expected that a board will have its HOA accounting system set up according to Generally Accepted Accounting Principles (GAAP) and is operated professionally. Those rules are unique to different states and countries. Most HOA board members and managers may not be accounting experts to the degree necessary which is why a CPA is hired to review it. That CPA can audit, review and advise on the ideal accounting practices and resolve important issues that occur.
Increasingly HOA’s use property management accounting software platforms which organize, streamline, and help ensure accuracy in recording transactions and producing reliable financial reports. The income statement, balance sheet, and ledgers all available within the software dashboard, helps inform the board and association members.
The automation/streamlining present in professional HOA software eases the possibility of errors, but doesn’t completely prevent them. Data entry errors and attribution errors can still create problems, yet software may help you find the errors and correct them.
An HOA or community association operating without online accounting management software is going against the tide in the digital era. Finding and choosing the right HOA accounting software begins with understanding what is it’s designed to do — fulfill accounting goals.
Basis of HOA Accounting Standards
The Basis of Accounting refers to how when you’ll record earnings and expenses. Earnings (revenues) and expenses (disbursements) don’t always coincide at the same time. For instance, after you record a Member’s fee due, or invoice them for an infraction, they often pay these dues and fines late. One particular method of accounting will allow you to keep late payments in the same accounting period as they accrued, thus this is the normal accounting basis used by HOA and community associations.
There are three bases of accounting:
1. Cash Basis – Cash Basis means revenue is recorded when earned and expenses are recorded whenever they are incurred (e.g. when member pays late). When you use the accrual basis of accounting, all HOA financial activities will be reported on the homeowners association’s financial statements. Accrual accounting is respected because it provides the most complete picture of your HOA’s financial health and status. The accrual basis conforms with the Generally Accepted Accounting Principles (GAAP).
2. Accrual Basis – The Accrual Basis, works in contrast with the Cash Basis of accounting and records events when they occur or accrue, as a cash transaction takes place. The term accrual is defined as an individual entry recording any revenue or an expense without a cash transaction taking place.
Revenues are reported when they are earned as opposed to when cash was received. As an example, when assessments are due, the amount received or paid is assessed as either a receivable or an expense under assets whether the payee paid or has yet to pay. You make the bookkeeping entry as soon as each is incurred instead of waiting until they are paid.
The Accrual Basis is the only method that conforms with the GAAP. This is the only accounting basis used for official recording and reporting for property management and also is the basis of accounting for homeowner’s associations.
Revenue accruals represent income or assets (including non-cash payments) yet to be received. These accruals occur when a good or service has been delivered and billed by a company (or a violation fine), yet the payment hasn’t been made by the member.
If an HOA expense is not yet paid (you’ve been billed) you can make an accrual entry in its general ledger. It may also be listed as accrued in the balance sheet and then charged against income in the income statement.
Common types of accrued expense include:
- interest expense accruals—these occur when an HOA owes monthly interest on debt prior to receiving an invoice
- supplier accruals—if goods or services are rendered from a supplier/vendor using credit and the HOA manager plans to pay the supplier in future
- wage or salary accruals—these labor expenses happen when an HOA board pays a contractor for a full month of work, before the end of that month.
3. Modified Accrual Basis — The Modified Accrual Basis (or Modified Cash Basis) is a combination of Cash and Accrual accounting methods. Modified accrual uses the Accrual Basis for reporting revenues while the Cash Basis is used for reporting expenses. Similar to the Cash Basis, the Modified Accrual Basis isn’t conforming to the GAAP rule. It is used for short term or unofficial reporting.
The HOA Accounting Records
As part of your HOA accounting system, you’ll be creating and managing these accounting records:
General Ledger — is the center of your HOA financial records, where you record every transaction, the transaction date, and numbering of those transactions. This list of transactions is known as the HOA chart of accounts.
Balance Sheet — This keeps the details of your HOA’s assets vs its liabilities and where your HOA equity is found. Assets and liabilities should be balanced, providing an immediate view of how much money is in your bank account and what your HOA’s net worth is (using HOA accounting software).
Income Statement — Income statements record your HOA income and expenditures, and the difference between them shows your monthly net income or loss.
Accounts Payable Report and Delinquency Report — The HOA Accounts Payable Report is a list of all unpaid debts your HOA has accumulated. The Delinquency Report contains all outstanding payments owed to your HOA (dues, fees, etc.).
Cash Disbursements Ledger — The Cash Disbursements Ledger (Check Register) records the checks your HOA has written and includes the payee’s name, the date issued, the check number, and a short description of the purpose of the check.
Accrual Method Complies with GAAP
As a reminder, the Accrual accounting method is the only method that conforms with the GAAP. This basis provides a more helpful view of a company’s financial situation than traditional cost accounting since it records the company’s current finances as well as future transactions.
A liability or receivable allows you to account for unresolved items, and create accurate reports. This is more helpful to HOA members who are eager to ensure the manager is in control of board finances.
This article was a simple introduction to help you understand the HOA accounting factors that will determine which accounting basis you will likely use for your homeowner’s association. Your accountant will help you understand and choose the right approach for your HOA.
ManageCasa™ HOA Software
ManageCasa’s modern and powerful software for HOA management includes some advanced features you’ll appreciate to make your revenue collection (dues and violation fine collection) more efficient and effective.
You’ll enjoy these 21 features/benefits and more:
- collecting funds online and paying vendors online
- avoiding heavy paper usage, typing errors and extra data entry
- fast reconciliation of accounts
- automate the creation of transaction records based on your customized setup
- not paying merchant processing fees
- setting up autopay to automate late payments or late fees
- managing properties, units, common or community areas, and buildings more easily
- automated ticketing system to receive maintenance requests, architectural inquiries or track violations
- securely managing owner and resident data securely
- giving members/owners a member portal to view, share and store documents, and find help for issues
- create work orders and control completion of maintenance tasks
- send and receive service work bills via the ManageCasa payments system
- create budgets to forecast income and expenses and view charts of data to aid in financial planning
- sync your budget with your customized Chart of Accounts
- generate real time financial reports including budget vs actuals, Balance Sheet, or P&L and easily share reports with authorized individuals
- a robust accounting module to automate charge and payment and reconcile them with your bank account
- record, track, manage and report violations for discussion amongst board members.
- communicate effectively with homeowners to get issues resolved
- manage multiple HOA or community associations in different locations
- 24×7 access to all of their data from a mobile device
- be able to add and automate additional revenue generating services
Residential real estate management has evolved in the last 5 years with complex regulations and increasingly mixed portfolios. And for firms that offer services for multiple HOA’s or community associations, good software is a huge buiness asset. Make sure you have the best — ManageCasa.
Contact our sales team now and ask your questions and arrange a demo.
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