HOA Bookkeeping Understanding Different Methods Available

hoa accounting best practices

It helps in determining whether the association is operating at a profit or loss. As previously mentioned, the accrual basis operates by the principle of recording revenues when earned and expenses when incurred (not when the cash is actually received). In most cases, payment is not made immediately as in a regular cash transaction, therefore, the need for recording payments that are owed to the HOA. Using the Cash Basis of Accounting, you record income and expenses when money changes hands. That means you only report transactions when you pay for them or receive payment for them. Using this method, no such account titles like Assessments Receivable or Accounts Payable appear on your financial statements.

  • Any CPA you choose to look over your records is required by professional standards to issue you one of three different reports.
  • When some people don’t pay it can cause a lot of stress on your community’s budget.
  • This way, you can offset some of the delinquencies and avoid ending up with a budget deficit.
  • The auditor is in a tough situation because materiality is actually defined from a user’s viewpoint.
  • It involves examining and reviewing the financial statements and discussing internal controls with the management company.
  • If there are irregularities, an audit can help the HOA identify and fix small problems early on before they turn into bigger issues.

HOA Accrual Accounting vs Cash and Modified Accrual Accounting

To help you we’ve put together this list of collections best practices for condo communities & HOAs. Unfortunately, no matter how diligent a board is, there’s always a chance that the association could find itself facing financial difficulties. Another sign is a decline in property values or difficulty attracting new residents due to the financial instability, impacting the community's overall desirability.

Why Accrual Accounting for HOAs Is the Best

hoa accounting best practices

One of the most significant is to monitor the community’s financial health. Typically it is required by the HOA bylaws, but it also can be required at the state level. The HOA board may also request n adult as a result of unusual situations like Board or management turnover. By disclosing and discussing internal control weaknesses with the CPA, the HOA will hopefully improve its financial reporting process.

Prioritize the Community

A good way to reduce costs in the long-term is to have a professional conduct an annual onsite insurance evaluation of your association’s properties. Preventing problems is infinitely cheaper than remedying them, and anticipating what those problems are is the first step. Apart from planning a 1-year budget, you should also create a 3- and 5-year financial plan. Determine any upcoming large projects your association may take on in the coming year and account for them.

hoa accounting best practices

These documents will be available to everyone in the community, most of which do not have advanced accounting degrees. For an HOA financial statement to be effective, proper preparation is key. Making it too complicated alienates people and hoa accounting hinders community relations. Common mistakes like failing to reconcile bank statements regularly, neglecting to plan for long-term expenses, and not keeping a reserve fund can have serious implications for the HOA’s financial health.

  • For instance, while you can transfer money from your reserve fund to your operating fund on a temporary basis, you should think about what state laws apply.
  • Then we will mail out a welcome letter to owners with payment options, our contact info and how owners can set up online access.
  • Do you have a library of prior financial statements you can view online?
  • As previously mentioned, the accrual basis operates by the principle of recording revenues when earned and expenses when incurred (not when the cash is actually received).
  • The CPA will also conduct an inspection of your HOA’s minutes and contracts for errors.
  • This accounting method frequently uses Cash as an accounting entry, increasing when you receive income.
  • Simply put, accrual accounting remains the best HOA accounting method because it paints a more accurate picture of your association’s finances.

By overcoming the top 5 issues that self-managed communities encounter you can have a great experience that meets or exceeds that of communities that pay for full management at a fraction of the cost. The Income Statement is meant to inform the Board how the association is doing compared to its budget. It shows the current period actual expense, budgeted expense and any variance between the two. To discover your organization’s next-generation accounting solution, request a FRONTSTEPS demo today. 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.

For your clients, this is another HOA account best practice that we recommend. Use your HOA accounting software to set up automatic payments for any of your clients’ recurring bills, from utilities to landscaping. It’s recommended to do this electronically as an accounting best practice. By balancing the books in your HOA accounting software, instead of doing it by hand, you can help eliminate errors and ensure accuracy. The procedures performed are the most extensive compared to reviews and compilations.

  • If an HOA board believes that there is high likelihood that fraud exists, they could engage a fraud audit or agreed upon procedures.
  • These remote financial management and administrative services handle over 55% of the work of operating a community, so you can rest easy knowing that your HOA or Condo community is taken care of.
  • Proper accounting practices maintain transparency and accountability within the HOA.
  • These accounting best practices for HOA financial management require organization, dedication, and attention to detail.
  • A well-managed HOA typically maintains a reserve fund equivalent to 30% to 40% of its annual budget, ensuring financial stability for unexpected expenses and long-term maintenance projects.

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. The Balance Sheet provides you with a look at your association’s financial health. It indicates your association’s net worth by subtracting your HOA’s liabilities from your assets. The accrual method is the only basis of accounting that conforms with the Generally Accepted Accounting Principles (GAAP). Because you record transactions as you incur or earn them, you instantly know how well your HOA is doing financially.

Bank Reconciliation Report

Newer HOAs or ones with more basic budgets can prepare one every month without much issue. When HOA board members embark on a search for a new accounting solution, they should make sure they’re getting a best-in-class option. This will not just enable them to take their accounting method and financial practices to a new level, it will ensure they can go longer without performing another upgrade.

  • Maintaining adequate reserves is another essential aspect of financial stability.
  • Generally, there are five financial statements HOAs should prepare — Balance Sheet, Income Statement, General Ledger, Cash Disbursements Ledger, and Accounts Payable Report.
  • That being said, if you find yourself in a position where financial responsibilities are becoming overwhelming, it’s in everyone’s best interest to hire a professional who can get the association back on track.
  • Under the Accrual Basis, all financial activities are reported on the HOA’s financial statements.

Since a review is much lower in scope than an audit, it only provides limited assurance that the financials are free of material misstatement. An HOA audit is a little easier than the typical small business audit. But it still requires specialized knowledge of how HOAs and condo associations work and what areas of the audit require additional focus.