Balance sheet

A snapshot, not a period

Your monthly board package usually includes two very different kinds of report. One covers a stretch of time, like March 1 through March 31. The other captures a single instant: the close of business on March 31. The balance sheet is the second kind.

"A balance sheet lays out the ending balances in a company's asset, liability, and equity accounts as of the date stated on the report."

Source: The balance sheet, AccountingTools

Ask your treasurer for a balance sheet from six months ago and one from today. Neither tells you what happened in between, only where things stood on that one day. For a picture of activity over a period, you want the income statement, which nets revenue against expense for a stretch of time. The two reports answer different questions, and neither substitutes for the other.

Why the two sides always match

Every balance sheet is built from three buckets: assets (what the association owns or is owed), liabilities (what it owes to others), and equity, usually labeled fund balance for an association (what is left after subtracting liabilities from assets). The report only balances because the third bucket is defined as the difference between the first two. Assets equal liabilities plus equity, always, by construction.

An asset is not just cash in the bank. Accounting standards define it by what it will do for the association in the future, not by what it cost.

"Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events."

Source: Statement of Financial Accounting Concepts No. 6, Financial Accounting Standards Board

That is why an unpaid assessment counts as an asset even though no cash has arrived yet, and why a prepaid insurance premium counts as an asset even though the association already wrote the check. Both represent a future benefit the association is entitled to.

What actually shows up on an HOA balance sheet

Four items account for most of the activity on a typical association balance sheet, and each has its own lesson in this Course if you want the full picture.

Accounts receivable is money owners owe the association, chiefly unpaid assessments, and it sits on the asset side. Accounts payable is money the association owes vendors for work already done, and it sits on the liability side. A prepaid expense, like a year of insurance paid in one January check, is an asset until the coverage is used up. An accrued expense, like December utility usage the utility has not billed yet, is a liability the association owes before any invoice shows up.

Fund balance, the equity bucket, is often split between an operating fund and a reserve fund kept separate from each other. Whether and how money can move between those funds depends on your governing documents and your state's statute. Treat the split as informational, not as permission to shift money freely.