Academy/Financial Statements for Non-Accountants
Cash vs accrual accounting
Two ways to time the same dollar, and why one of them can make your association's income statement look healthier than its bank account.
Cash basis records income when money arrives and expenses when they are paid. Accrual basis records income when it is earned, such as an assessment billed to owners, and expenses when incurred, regardless of when cash actually moves. Most associations recognize assessment revenue this second way, which is why the income statement can look healthier than the bank balance.
Two ways to time the same dollar
Every transaction has two possible dates: the date it happened and the date the money moved. Cash accounting only cares about the second one.
"Under the cash method, you generally report income in the tax year you receive it, and deduct expenses in the tax year in which you pay the expenses."
Source: Publication 538, Accounting Periods and Methods, Internal Revenue Service
Accrual accounting cares about the first date instead.
"Under an accrual method, you generally report income in the tax year you earn it, regardless of when payment is received, and deduct expenses in the tax year you incur them, regardless of when payment is made."
Source: Publication 538, Accounting Periods and Methods, Internal Revenue Service
Why the income statement can run ahead of the bank account
Most associations apply accrual timing specifically to assessments, the recurring dues owed by every owner. That is a choice about when to count the revenue, not a rule about when the cash shows up.
"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 single sentence explains a pattern every treasurer eventually sees: a board bills $50,000 in assessments for the month, only $42,000 comes in, and the income statement still shows $50,000 of revenue. The missing $8,000 sits on the accounts receivable line as unpaid assessments, not as a loss.
Ask which basis your own board package uses
Publication 538 governs the association's tax return, not the monthly package a board reads at a meeting. Those two can legitimately use different bases, and there is no single rule that forces a board's internal reports onto one or the other; ask your CPA which basis your statements actually use.
What you can rely on: if the statements are accrual based, positive net income does not guarantee the association has that much cash on hand. A healthy bottom line can still be sitting, in part, as unpaid assessments the association has not yet collected.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
Your treasurer says the association billed $500 in assessments this month but only collected $300. On an accrual basis, how much assessment revenue appears on this month's income statement?
The association's bookkeeper pays the landscaping invoice in January for services performed in December. Under the cash method, which month shows the expense?
A CPA is preparing the HOA's year end income statement. Under accrual accounting, unpaid owner assessments still on the books are treated as what?
Sources
- Publication 538, Accounting Periods and Methods, Internal Revenue Service
- Revenue Recognition, Community Associations, DesRoches & Company, CPAs
Financial Statements for Non-Accountants
Once you can tell cash from accrual, the next step is reading what an income statement actually reports.
Whether your board's monthly financial package is prepared on a cash or accrual basis, and whether that matches your association's tax return, varies by association. Confirm the basis with your CPA rather than assuming.