Homeowners Associations (HOAs) are organizations formed by residential communities to manage common areas, administer regulations, and handle financial matters. Homeowners pay a membership fee, and in exchange, the HOA invests in community development and sets and enforces rules for residents. HOAs in the US oversee 355,000 unions, and up to 22 new communities are registered daily. On average, residents pay a $250 monthly fee for a single-family home. Thus, HOA leaders manage significant inflows and outflows of capital.
With membership dues paid monthly, HOAs manage transactions very frequently. However, it’s not just membership income – HOAs also need to pay vendors, invest in projects that improve the community, and make accurate tax payments. These tasks are almost impossible without an effective HOA accounting system. In order to help your organization avoid financial difficulties, we’ll go over the fundamentals of HOA bookkeeping and explore the importance of effective property management.
About HOA accounting. Why does it matter?
In a general sense, HOA accounting is the process of recording and managing an HOAs financial activity, which is summarized in financial reports. An HOA is like any other business – it brings in revenue and makes expenditures. However, there is one key difference -profit is not the primary goal. Instead, the purpose of an HOA is to create a pleasant and livable community. Poor financial management undermines these goals and can lead to severe consequences, including:
- Harm to community well-being: in exchange for membership dues, HOA members expect effective investments in the community’s well-being. If funds are mismanaged, the community will miss out on these benefits.
- The collapse of the entire union: imprecise HOA records may lead to overspending or making ill-advised financial decisions that sink the entire association.
- Lack of capital: without an effective budget, an HOA will run out of funds. The HOA will be forced to either take out credits or demand additional payment from homeowners.
An HOA board’s fundamental responsibility includes managing the organization’s savings, but board members sometimes struggle with this responsibility. In the worst cases, disgruntled residents have been known to sue HOA leaders for financial mismanagement. Board members have been accused of using HOA funds for personal gain, even to buy extravagant meals.
How to conduct HOA accounting
A reliable record of your organization’s financial flows helps you to understand its financial position at a glance. However, HOA accounting requires much more than record-keeping. It’s essential to set up the appropriate accounting system for recording financial data and generating reports.
Choice of accounting method for HOA
You have several options, which differ in how they interpret the timing of financial transactions. Consider their key features:
- Cash basis: you report profit and expenditures only after the money arrives in your account or goes to the counterparty. While intuitive, this method prevents you from seeing the full picture of your financial situation, such as the value of accounts payable and receivable. Also, since it does not comply with GAAP directives, you can’t use the cash system to prepare official documents.
- Accrual basis: you record profit and expenditures after a transaction occurs. Suppose homeowners are due to pay membership fees by a certain deadline; these sums are shown as assets in the HOA’s balance sheet, even if residents haven’t actually paid their fees yet. The accrual system provides a more helpful overview of your finances and is the only method that is fully GAAP compliant.
- Modified basis: this method combines aspects of cash and accrual basis accounting; it uses the accrual technique when reporting capital inflows and the cash system when reporting expenditures. This method is not GAAP compliant, but it can be used for filling out informal documents.
In addition to being GAAP compliant, the accrual algorithm is considered best practice because it provides a more comprehensive description of your HOA’s finances. If you try to control costs on a cash basis, you can be easily misled. For example, let’s say your HOA enters a roofing contract, but will not have to pay the $65,000 due until you receive an invoice. Until your payment is reflected in your financial reports, the board of your HOA may mistakenly believe that they have more funds available than they actually do. This scenario can result in ill-advised decision-making.
Preparation of financial documents
HOA financial documents are annual and monthly statements that reflect the association’s current financial position. There are many types of documents that you might use, and at varying frequencies. So, let’s go through the most commonly used financial reports, according to GAAP directives:
- The balance sheet is a statement of an organization’s holdings and obligations. It combines your HOA’s resources with its debts and personal capital, giving you an idea of how much capital your HOA has at its disposal. Assets include savings in accounts, liabilities, residual insurance, etc. Insurance is recorded here because it is usually paid upfront and capitalized on the balance sheet. Let’s say your union bought insurance for $1,800 at the start of the year, and that money will show up on the document as the policy cost. At the end of each month, this asset’s value will depreciate by $150.
- The profit and loss statement relies on the rule: total earnings – total spending = total profit or loss. It illustrates the results of your financial performance in the last period. Gains and expenditures are divided into separate categories, so you easily understand where the organization’s savings are going. You can also analyze the profit and loss statement to identify problems and make adjustments, e.g., to increase lawn maintenance costs or find a cheaper building material supplier.
- The general ledger is a checklist of the HOA’s commercial transactions, showing dates and amounts of transactions. Once you have implemented an accounting system, you can filter earnings and expenditures by category, or by other criteria.
- Accounts payable reporting: business owners should know what they owe suppliers. Accounts payable contains the names of suppliers, payment terms, and sums. This document serves as a reminder for timely payment, and helps you avoid gaining a reputation as an untrustworthy counterparty.
The most common error when preparing HOA financial statements is a lack of detail. Every transaction counts, as does information about the transaction. Make sure to properly record every financial transaction, so that you can be confident that your financial data accurately reflects your HOA’s situation.
HOA financial audit
An audit is an in-depth examination of an organization’s records. It is meant to provide a precise and objective assessment of all financial documents, so that the association can be confident that its records are honest and complete. Moreover, audits turn up errors in financial data, which allows you to fix problems before they become a threat to your HOA.
Some states require HOAs to conduct annual inspections, while other HOAs are able to organize audits without legal requirements. Since audits can cost over $4000 apiece, some unions choose to only run them every few years.
How often should you generate HOA economic documents?
There is no set period for HOA financial reporting. Your timeline may depend on various factors, including local directives, the scale of the union, and its purpose. However, the more often you report, the more valuable data the board will receive. That’s why new HOAs or associations with limited budgets are encouraged to generate financial statements on a monthly basis. In contrast, larger communities with tiered budgets often report on an annual basis.
When setting up your HOA’s financial system, it’s very important to establish how often your association will write financial ports and stick to this frequency. Any deviation can worsen the relationship between board participants and property owners. You should always be fair and open when creating reports.
Recommendations and reminders for HOA accounting
If you are unsure about HOA accounting, you should consider seeking out a qualified consultation. Financial professionals can help you effectively manage your HOA budget and other financial matters. According to their expert recommendations, your HOA should:
- Deposit and withdraw funds from the appropriate accounts: when the HOA’s savings are low, the board may be tempted to withdraw money from a reserve fund or other account, causing confusion.
- Grasp your state’s laws: some regions require HOAs to file reports in particular ways.
- Ensure that transaction information is understandable to other users. If your union has a treasurer, they should be able to quickly and easily figure out where funds are going and coming from.
When planning your expenses, don’t worry if you go over your budget by one or two points. There will always be categories that exceed the limit, but you can still stay on track financially by making adjustments and cutting back on spending in other areas.
Advantages of outsourcing HOA accounting
If your organization wants to minimize expenditures, you should strongly consider outsourcing your homeowners association accounting to qualified experts. This is a cost-effective solution that improves your association’s profitability in the long run. Let’s go over some of the benefits of delegating your bookkeeping to professionals:
- Essential expertise: financial specialists have the education and skills to assist board members in making sound financial decisions. They perform in-depth financial analysis and forecasting to help develop an effective financial strategy for your HOA.
- Experts implement state-of-the-art technology: experienced bookkeepers use advanced accounting software to solve problems quickly and precisely. With convenient virtual resources, community members can enjoy reliable communication and an easier payment process. Plus, your HOA will save time and money.
When you choose a reliable company to manage your HOA’s finances, you can rest easy that all of your financial reporting needs will be completed precisely and on time. First, though, you need to find the right team. Be sure to do your research before signing an agreement with a financial firm. You should read reviews of different companies before making your final decision.
Professional assistance to cover your accounting needs
Every residential association should follow responsible HOA bookkeeping practices; after all, your HOA’s economic situation is only as reliable as the methods and instruments that measure it. That’s why it’s so important for HOA leaders to have a solid system for maintaining records and generating financial statements. Without effective oversight, your organization and community will struggle.
BooksTime can relieve the burden of managing your HOA’s finances. Our team of financial experts provides accounting and bookkeeping services to HOAs across the country. Our team will help you calculate a budget, generate economic reports, and help your HOA achieve financial stability. Best of all, we help you save money and free up time to focus on the development and well-being of your community. Fill out an application on the site today to receive a qualified consultation.
