An Hoa Accounting Guide For HOA Board Members
Accounting is arguably one of the most challenging aspects of managing an HOA community. Yet, HOA accounting remains an integral part of your job as an HOA board member.
The Importance Of Proper HOA Accounting
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.
Poor HOA financial management can lead to a number of possible consequences both for the HOA and its board. For one thing, bad HOA bookkeeping can cause a major financial fiasco within the association. You might end up overspending and making poor financial decisions as a result of inaccurate records.
Insufficient funds is another possible consequence of poor homeowners association accounting. When you fail to budget your expenses properly, the HOA might run out of money. This will inevitably force your board to either take out a loan or charge special assessments to homeowners. And, if you have any experience with HOAs at all, you’d know that homeowners hate having to pay special assessments on top of their monthly dues.
Your HOA board has a duty to manage the association’s finances correctly. In some cases, members of the community might take legal action against your board for mismanagement. And, although state laws and your governing documents might offer you some protection, court rulings may still find you personally liable for poor HOA accounting and financial management.
What Are The HOA Financial Statements?
The homeowners association financial statements are monthly and yearly reports that act as a clear representation of your HOA’s financial health. There are a number of different financial statements you should prepare every month. According to most HOA accounting rules and GAAP, though, the following are essential:
Balance Sheet
The HOA balance sheet compares your association’s assets against your liabilities and owner’s equity. It gives you a complete look at your HOA’s net worth, including how much money you have in your bank account.
This statement gets its name from its guiding principle — your balance sheet should always be balanced. That means your assets should equal your liabilities plus equity. It follows the equation below:
Assets = Liabilities + Equity
Statement Of Income & Expensive
Of all the HOA financial statements, the Statement of Income & Expense is arguably the most crucial for proper money management. This report follows the equation:
TOTAL INCOME – TOTAL EXPENSES = TOTAL PROFIT/LOSS.
Basically, it shows you whether or not you made money in the past month.
Additionally, it breaks down all of the association’s income and expenses. This gives you a detailed look at where your money is going. 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.
Furthermore, the board can use this report to compare actual expenses incurred versus the budget allocated. Based on these numbers, you can focus on problem areas and adjust accordingly. Whether that means raising the budget for lawn care, increasing assessments, or looking for a cheaper vendor is entirely up to you.
General Ledger
Your general ledger is where you record all of your accounting transactions following the date of occurrence and a numerical order you set known as the HOA chart of accounts. It is the basis of all your financial reports.
Accounts Payable Report
It’s important for any homeowners association to keep up-to-date on their payments to vendors. After all, you wouldn’t want to develop a reputation as a bad creditor. This is where the Accounts Payable Report comes in.
The Accounts Payable report shows you all of the association’s unpaid expenses. The format typically consists of the vendors owed, the terms of payment, and the amounts owed. 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.
Account Delinquency Report
If an Accounts Payable Report tracks your association’s debts, an Accounts Delinquency Report tracks amounts owed to the association. Let’s be honest — collecting monthly fees and assessments from homeowners can be tough. However, it can be twice as difficult when you have no records of their debts.
The Accounts Delinquency Report shows you the association’s total accounts receivables. It includes a list of residents who are late on their payments, as well as the amounts they owe and how long the amounts have remained unpaid. Amounts are sorted into four sections: current, over 30, over 60, and over 90. Current refers to amounts aged below 30 days. The other three sections refer to amounts over the respective number of days.
Some people also refer to this report as the Accounts Receivables Report. While they are different in name, they are similar in function. With this report in hand, collection can be a pinch.
Cash Disbursements Ledger
Lastly, the cash disbursements ledger lists down all of the checks your association has written and issued for the period specified. Otherwise known as a check register, this report consists of information such as the check’s recipient, the check date, and a description of the expense. It should also outline the check numbers, chart of accounts numbers, and any related invoice numbers.
What Is An HOA Audit?
Simply put, an HOA audit is a comprehensive analysis of your association’s accounting records, including your financial statements. It objectively evaluates your internal accounting processes as well as the overall health of your association. An audit identifies any inaccuracies in your records in an effort to remedy them.
How often should an HOA be audited? It depends on your state laws and what your governing documents say. Some HOA bylaws require yearly audits, while others only require one every three or so years.
Audits shouldn’t be performed in-house by the HOA. Instead, it should be performed by a Certified Public Accountant.
What Are Some HOA Accounting Best Practices?
Managing your association’s finances isn’t always easy, particularly if you don’t know where to start. Here are some tips for proper accounting for homeowners associations board members:
1. Familiarize Yourself With State Laws
Not all accounting rules are consistent across all states. Some have their own laws that dictate what homeowners associations can and can’t use.
Understanding the laws special to your state will save you a lot of time and trouble. It can also protect your association and board from potential legal issues.
2. Accounts Should Be Specific And Future-Proof
When crafting your chart of accounts, it’s a good idea to be as specific as you can. For example, when tracking income, don’t just use the same general account title for all types of income. Use more specific categories such as “Assessment Income” and “Newsletter Advertising Income.”
The same goes for expenses. 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.
You should also be wary of creating account titles on the fly. Not all expenses take place every year, but you should still plan for them to be categorized under the same account regardless of when they occur. Don’t use “Events Income” one year and then “Income from Events” two years later. Consistency is key here.
3. Add And Deduct From The Right Accounts
HOA accounting can be very confusing — enough to make you use the wrong accounts when recording revenue and expenses. Far too many associations have made the mistake of deducting from their operating fund when they meant to deduct money from their reserve fund. It might seem like a small error, but it can throw your whole accounting setup into chaos.
4. Prevent Fraud With Internal Controls
One of the best homeowners association accounting rules to adopt is to exercise internal controls. That means not letting a single person have control over every financial department. Ideally, the person who writes the association’s checks should be different from the person handling receivables.
You should also make sure that checks made out to your HOA go directly into the proper bank account. It’s also a good idea to assign someone, usually the HOA manager, to review all invoices, deposits, and bank statements.
It might seem tedious, but establishing these internal controls can deter fraud and prevent theft within your association. After all, your board has a duty to protect your HOA finances and assets.
What If A Homeowner Goes Bankrupt?
When a homeowner declares 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.
Still, it’s important to be considerate of the bankrupt homeowner. Understand their situation and never reveal the status of their financial health to other homeowners in the community. It’s also not recommended to restrict their access to amenities or shut off their utilities during a trying period in their life.
Applying HOA Accounting Standards
Every community must have HOA accounting standards in place. Your financials are only as reliable as the practices and procedures that define them. As the association’s Board Members , you’re responsible for keeping accurate records and financial reports. Without these tools, the entire community could very well fall apart.
While accounting is a process largely invisible to the rest of the community, it remains a fundamental pillar of success. Granted, it can be a challenging task to take on. This is where we come in. For professional help with your association’s finances, give us a call at (760) 290-4426 or email us at [email protected]
