Academy/Financial Statements for Non-Accountants
Accounts receivable
Why your income statement can show revenue that isn't in the bank yet.
Accounts receivable is money owners owe the association that has not yet been paid, mostly unpaid assessments. It appears as an asset on the balance sheet because assessment revenue is recognized in the period it's billed, not when it's collected. A high receivables balance means the income statement can look healthier than the association's actual cash position.
What counts as accounts receivable
For most associations, accounts receivable is almost entirely unpaid assessments: the regular dues an owner has been billed but hasn't paid. It sits on the asset side of the balance sheet, because an asset is anything that represents a probable future benefit to the organization, and an unpaid assessment is exactly that: money the association expects to collect.
"Accounts receivable are the amounts owed to a company by its customers. Receivables are only created when sales are made on credit."
Source: The difference between accounts receivable and accounts payable, AccountingTools
Why unpaid assessments show up as revenue at all
This only makes sense once you see the accounting method behind it. Under accrual accounting, income is recorded when it's earned, not when the cash arrives. Association accounting follows that model for assessments specifically: revenue is booked the month it's billed, whether or not the owner has paid.
"Current industry practice is to recognize revenue from regular assessments in the periods in which they are assessed, regardless of when they are collected or expended."
Source: Revenue Recognition, Community Associations, DesRoches & Company, CPAs
That's why a board can look at an income statement showing a healthy surplus while the bank account tells a different story. The gap is sitting in accounts receivable.
What a growing receivables balance tells the board
Positive net income does not mean the association has the cash to match. If a meaningful share of assessed revenue is unpaid, that surplus is partly on paper. This is one reason boards track a receivables aging report, showing how much is 30, 60, or 90 days overdue, alongside the budget-vs-actual variance report.
How often your board must review receivables, and whether a specific aging or delinquency report is required, depends on your state and your governing documents. California, for example, requires monthly review of a specific set of documents that includes receivables detail:
"the check register, monthly general ledger, and delinquent assessment receivable reports."
Source: Civil Code Section 5500, State of California
Check your own state's statute and your governing documents for what your board is actually required to review.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
The income statement shows $45,000 in assessment revenue this quarter, but the bank balance only grew by $30,000. What most likely explains the gap?
A board member says accounts receivable is basically money the bank already has. What is wrong with that statement?
Which of these belongs in accounts receivable on the association's balance sheet?
Sources
- The difference between accounts receivable and accounts payable, AccountingTools
- Revenue Recognition, Community Associations, DesRoches & Company, CPAs
- Statement of Financial Accounting Concepts No. 6, Elements of Financial Statements, Financial Accounting Standards Board
- Civil Code Section 5500, State of California
Financial Statements for Non-Accountants
Next, see how accounts payable is the mirror image of receivable, and how the two together explain who owes whom.
How often the board must review receivables, and whether a specific aging or delinquency report is required, varies by state and by your governing documents.