HOA accounting 101

Two funds, two jobs

Every association's money lives in one of two places. The operating fund pays for what the community uses this month: landscaping, utilities, insurance, management fees, payroll, pool chemicals. The reserve fund pays for what the community will need eventually: a new roof, resurfaced asphalt, a rebuilt pool, a modernized elevator. Fund accounting is the system that keeps those two pots from blending together, so money set aside for a roof can't quietly become this month's landscaping budget.

The operating fund "pays for the things the community uses today: landscaping, utilities, insurance premiums, management fees, payroll, pool chemicals." The reserve fund "pays for the things the community will need tomorrow: roof replacement, asphalt resurfacing, pool resurfacing, elevator modernization."

Source: Operating Fund vs. Reserve Fund: The Critical Distinction Every HOA Board Must Understand, Common Interest Community Standards Council

Assessment income shows up before it's collected

There are two ways to count money. The cash basis records income when it lands in the bank and expense when it's paid. The accrual basis records income when it's earned and expense when it's incurred, whether or not cash has moved yet. Most associations run their books on the accrual basis, which means a delinquent owner's unpaid assessment still counts as revenue the month it was billed, not the month, if ever, it's 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 comfortable surplus while the bank account tells a leaner story: part of that surplus is sitting in unpaid assessments, an account receivable, that hasn't turned into cash. See Cash vs accrual accounting for the full picture.

Every report is built from the same stack

Underneath every financial package sits the same four layers. The chart of accounts is the numbered list of every account the association uses. Every transaction gets posted into the general ledger, the master record of everything that happened. Before anyone prepares a statement, a trial balance proves the books actually balance, total debits against total credits. Only then do the two reports a board actually reads get produced: the balance sheet, a snapshot of what the association owns and owes on one specific day, and the income statement, a summary of revenue and expense over a stretch of time, usually a month or a year.

Know how much checking actually happened

How closely a board is required to check these numbers each month varies by state. California, for example, requires the board to review a monthly reconciliation of both operating and reserve accounts, budget-to-actual figures, bank statements, and the check register. Other states and your own governing documents may require less, more, or nothing specific, so confirm what applies to your association.

At year end, know which of three engagement levels your CPA actually performed, because the assurance behind the numbers is not the same.

"In a compilation, a CPA does not provide any assurance. The CPA does not have to be independent, but the CPA must indicate a lack of independence, if applicable, in the report."

Source: What is the difference among a compilation, review, and audit?, AICPA & CIMA

A review adds limited assurance through inquiry and analytical procedures. Only an audit tests internal controls, assesses fraud risk, and results in a formal opinion. Ask your board which one you're getting, in writing, every year.