Maintaining the finances for even a small community association is not always easy. Frankly, a lot of work goes into collecting dues, paying invoices, and keeping a budget, among other tasks.
Accounting specialists often use jargon that, for many people, might as well be in another language. To eliminate confusion, we have explained some of the most commonly-used terms in community association accounting settings.
Cash Method of Accounting – Income and expenses are only recorded when cash changes hands. Financial reports only reflect cash transactions. This is a relatively simple system for simple situations. Because all obligations are not recorded until cash changes hands, this method does not provide an accurate portrayal of the financial condition of the association at any given time.
Accrual Method of Accounting – Keeps track of all financial activities, including revenue as it is earned (as opposed to when it is received) and expenses as the obligation is incurred (as opposed to when it is paid). This makes a more accurate determination of the financial condition of the association possible at any point in time. Also, this is a better method for multi-year tracking of capital reserve credits and deficiencies. The primary disadvantage is the greater complexity and technical knowledge that is needed to maintain the records, understand the reports, etc.
Capital Reserves – The board has the obligation to repair and replace major capital facilities, buildings, and equipment of the association. The ideal method of providing for these future expenses is the establishment of a capital reserves system and budget to assure that such funds are available when needed. With knowledge that the future holds predictable major expenditures for repair and replacement of facilities and equipment, the association could begin the gradual accumulation of funds through a reserve account to meet all or a portion of that expense when it comes due.
Assets = Liabilities + Equity
The accounting equation is the cornerstone of the standard system of finance. The equation explains the principle of equity, which is the difference between an association’s assets and its liabilities:
Put simply, AP is money owed by an association. The money could be owed to a vendor. This appears as a liability on the community’s balance sheet. Accounts Payable is a form of credit, in which a vendor allows the association to pay for goods or services after they have been delivered.
Any money owed to an association. Usually, this money is collected in the form of homeowners assessments, commonly called dues. The amount of money owed to the association appears on the balance sheet as an asset.
The balance sheet is a summary of an association’s financial balances and offers a glimpse of the association’s financial health. This is composed of:
Assets – Economic resources, both tangible and intangible
Liabilities – Economic debts
Equity – The difference between assets and liabilities
The process of determining the difference between the amount of money in an association’s financial records and the amount in the association’s Bank statement. For example, if a vendor check has not been cashed, the bank statement would differ from the association’s records. Bank reconciliation would determine that the un-cashed check is the cause for the discrepancy.