Academy/Financial Statements for Non-Accountants
Income statement
The report that answers one question: did the association take in more than it spent this period.
An income statement, sometimes called a profit and loss statement, shows revenue and expenses for one period, usually a month or a year, netted to a bottom line of net income or net loss. It answers whether the association took in more than it spent during that period. It does not tell you how much cash is actually sitting in the bank; that is a different question, answered by other reports.
What the income statement actually shows
The income statement covers a stretch of time, not a single date. It lists every dollar of revenue earned and every dollar of expense incurred during that stretch, then subtracts one from the other to get a single number: net income if revenue wins, net loss if expense does.
"[An income statement] presents revenues earned and expenses incurred to determine net income or loss."
Source: Income statement definition, AccountingTools
For a board, that bottom line is a useful headline, but it is only a headline. The next two sections cover the two ways it commonly gets misread.
Why net income and cash are not the same number
Most associations recognize regular assessment revenue on the income statement the month it is assessed, not the month an owner actually pays. That is the accrual method applied to HOA accounting.
"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
So an income statement can show a healthy net income while a chunk of that "income" is sitting unpaid in accounts receivable, meaning delinquent owner assessments the association has not actually collected. A board that only reads the bottom line can walk into a meeting thinking the year went well and miss that a real cash problem is building underneath it.
Income statement versus balance sheet
The income statement is a period; the balance sheet is a single date. One tells you what happened between two points in time, the other tells you where things stand at one of those points.
"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
Whether your board's monthly package presents these on a cash or an accrual basis is a question for your treasurer or CPA, since the tax return basis and the internal reporting basis are legitimately allowed to differ. Ask which one you are looking at before you compare month to month.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
The year-end income statement shows a healthy net income, but the bank balance barely moved all year. What is the most likely explanation?
A treasurer says, "Our income statement is healthy, so our balance sheet must be too." What is wrong with that statement?
A board is comparing this month's income statement to the budget and sees total expenses running higher than planned. What should the board look at next?
Sources
- Income statement definition, AccountingTools
- Revenue Recognition, Community Associations, DesRoches & Company, CPAs
- The balance sheet, AccountingTools
- The difference between accounts receivable and accounts payable, AccountingTools
Financial Statements for Non-Accountants
Next, see how this period's net income turns into the actual account balances on the balance sheet.
Whether your association's income statement is prepared on a cash or accrual basis, and how closely its format follows GAAP, varies by association and by CPA. Ask your treasurer or CPA which basis your board package uses before comparing numbers month to month.