If detailed records are not kept, it can be near-impossible to keep track of delinquent dues or know how much money is available to budget for community maintenance and new projects. Buildium, for example, offers a powerful set of features designed to help you easily stick to accounting best practices. From automatic bank reconciliation to generating compressive financial reports, it has everything you need to keep your association’s finances in tip-top shape.

Why Full HOA Management May Not Be Cost-Effective for Small HOAs

• Like the Cash Basis, the Modified Accrual Basis doesn’t conform with GAAP.
• The difference between total revenues and total expenses indicates the net income or loss for the period.
• By following the guidelines outlined in this guide, board members can navigate the complexities of HOA accounting with confidence and make informed decisions that benefit everyone involved.
• For instance, California Civil Code Section 5300 mandates the use of the Accrual Basis of Accounting when creating a pro forma budget.
• Don’t forget to think about all the third-party services that help keep your association running.
• Financial statements are written records of the association’s financial transactions.

This is one of the most important homeowners association accounting rules. Your General Ledger consists of all the association’s financial transactions. It acts as the basis from which all other reports are created and verified. HOAs should make association records available to all homeowners as stipulated in state laws and your governing documents.

Things like requiring two signatures on payments and constantly auditing where the money is being used are good ways to make sure that funds are spent responsibly. There should be controls to restrict and monitor access, as well as changes in financial records and systems. Internal controls also assist managers in preventing errors, which can improve the quality of financial information. Regardless of the accounting method chosen, there are certain financial statements that every HOA must maintain. These financial reports include the balance sheet, income statement (or profit and loss statement), and cash flow statement. Insufficient funds is another possible consequence of poor homeowners association accounting.

Yet, accounting for homeowners associations isn’t just writing down your expenses in a notebook. When setting up your HOA accounting standards, there are some key practices and reports you must include. In order to run a homeowners association, you’ll need to understand proper reporting. It’s necessary to pay attention to the HOA financial statements which you’ll get from the homeowners association management company.

Services

The Cash Disbursements Ledger is not limited to checks issued by the association, though. You can also record transactions made in cash to keep track of the cash outflow of your HOA. The Modified Accrual Basis of Accounting, also known as the Modified Cash Basis, uses an amalgamation of the Accrual and Cash methods.

Accrual Accounting Method

It provides an overview of income from assessments, fees, or other sources and outlines expenses such as utilities, maintenance, insurance, and management fees. The income statement helps assess the association’s financial performance and profitability. Homeowners’ Associations (HOAs) play a crucial role in managing and maintaining communities, ensuring that common areas and amenities are well-maintained and property values are preserved. Central to the effective operation of an HOA is proper accounting and financial management. This can start with generic accounting software—thinkQuickbooks—but you really start to see time savings and ROI with tools that are purpose-built for association and property management.

In these cases, having the correct paperwork in place can help to protect you in a court of law. However, it also doesn’t hurt to go the extra mile and take some time to familiarize yourself with federal, state and local tax laws, as well as to take advantage of tax-advantaged accounts. Doing this initial prep up front gives you the time to make adjustments as needed, spot any surprises in your books, and avoid errors that all too often come with a time crunch. Instead, you’ll want to focus on creating a streamlined system so that all the important players can easily be kept up to date in between meetings.

• Once the draft has been validated, it will likely be approved by the board.
• Yet, it also remains integral to the smooth operations of any community.
• Especially so help when you’re thinking about completing projects like adding a playground to the community or completing a major overhaul on the pool.
• For instance, even though there are three accounting methods, California law directs that HOAs should use the Accrual Basis when preparing their pro forma operating budget.

For checks, the check date, check number, payee, check amount, the invoice number, and a description of the expense are required. An Accounts Payable Report and Accounts Delinquency Report must also accompany the ledger. Professional accounting and bookkeeping services exist for this very reason. We understand that your time is valuable and that overextended board members become resentful and burned out.

Ensure Local and National Regulatory Compliance

They also promote transparency between the board and members or it can also be a law requirement. The frequency of preparation of HOA financial statements may vary depending on state laws, community bylaws, and the size of the association. Also known as the basis of accounting, the accounting methods dictate the timing at which you record your association’s financial transactions. There are three accounting methods to choose from — Cash Accounting, Accrual Accounting, and Modified Accrual Accounting. Engage accounting professionals with experience in HOA accounting to ensure compliance with applicable laws and regulations.

To keep them at bay, it’s a good idea to stay ahead of the game by budgeting smartly and planning for those big-ticket repairs and upgrades long before they’re needed. If you’re on the hunt for an HOA management company, our online directory lists the best ones by location. Break down your expense accounts into more specific accounts such as “Legal Fees” and “Maintenance Supplies.” In doing so, you can more accurately track where your HOA’s money is going. Finally, the Modified Accrual Basis of Accounting follows the Accrual Basis for reporting revenue and the Cash Basis for reporting expenses.

A homeowners association functions in very much the same way as any business organization. Though it doesn’t exist to earn a profit, an HOA does earn revenue and incur expenses, as well. The HOA board has a responsibility to protect the association’s assets and manage its finances. Therefore, you should practice proper accounting and financial management to ensure your HOA remains in good financial condition. Small homeowners associations (HOAs) may have fewer units to manage, but their financial responsibilities are just as crucial as those of larger communities. Proper bookkeeping ensures that funds are allocated correctly, bills are paid on time, and financial records remain accurate and transparent.

When a homeowner declares hoa accounting best practices bankruptcy, the first thing your HOA board should do is check with your attorney or management company. Keep in mind that there are certain bankruptcy laws that protect bankrupt homeowners. Therefore, you may not be able to push through with any pending legal cases with the homeowner or collect past due balances.

When it comes to insurance, your association’s governing documents likely outline the required policies and minimum coverage limits. From there, your insurance agent can walk you through whether your current coverage is adequate for the property and what the premiums will look like for the upcoming year. It’s important to note that these expenses are for routine upkeep to make sure everything’s running smoothly. Bigger projects, like upgrades or major improvements, fall under the reserve budget—more on that later. While this income can be unpredictable, it’s still important to track so you have a clear picture of your association’s overall monthly earnings. It also involves implementing best practices, maintaining transparency and accountability, and avoiding common mistakes.

What Are the HOA Financial Statements?

The best part is that effective HOA accounting doesn’t have to add work to your to-do list. Comprehensive association management software can automate many of your regular accounting tasks, as well as making storing and sharing your financial records much simpler. Many of the features outlined above, such as quick report generation, automated account reconciliation, and communication portals, are seamlessly integrated into Buildum’s platform. Following the tips above will help you keep your associations financially sound. Instead, prepare for filing your community association taxes early by recording all transactions, planning your deductions, and reconciling your bank statements often.

From here, you can determine whether the association has the funds to pay for these expenses. At the very least, this report serves as a reminder of sorts to pay your dues on time. Additionally, it breaks down all of the association’s income and expenses. The Statement of Income & Expense must also include year-to-date figures. That way, it can depict your HOA’s financial standing for both the month and the year thus far. As one of the main aspects of bookkeeping, maintaining a General Ledger must be intrinsic to HOA accounting rules.

Furthermore, it combats financial dishonesty within the board or among employees. Maintaining adequate reserve funds is essential for addressing long-term maintenance and repair needs. Conduct regular reserve fund studies to assess the association’s capital requirements. Develop a funding plan that ensures sufficient reserves are set aside for future major projects or unforeseen expenses. The association’s revenues, costs, and net income or loss for a given time period are compiled in the income statement.

HOA accounting encompasses much more than simply writing down any income and expenses the association incurs. It involves tracking and recording all financial activity so that the board can receive accurate reporting and know where the association stands. The easiest way to ensure all transactions are properly reported is by setting up accounting standards with each board.