There are three main methods of bookkeeping that HOA management companies use. These are GAAP, cash-based, and modified. As an HOA board member, it is important to have an understanding of the three methods that are used, their effects on financial reporting, and the advantages/disadvantages of each method to your HOA.
3 HOA Accounting Methods
Effective financial management is a cornerstone of a successful community association . Accurate accounting ensures transparency, builds trust among residents, and supports the long-term stability of the community. Let's take a look at three key HOA accounting methods that can help streamline your financial operations.
1. GAAP
GAAP is short for Generally Accepted Accounting Principles. In this method, revenues are recorded when earned, and expenses are recorded when incurred (regardless of the time when the payments are actually made). The advantage of GAAP is that it gives an accurate picture of the state of the HOA and all its transactions at any given time. This is because transactions are recorded at the time they occur and therefore the books are always up to date.
How Transactions are Recorded under the Accrual Basis
As previously mentioned, the accrual basis operates by the principle of recording revenues when earned and expenses when incurred (not when the cash is actually received). If the HOA, for example, sells one of its assets today, the transaction is immediately recorded in two accounts; one called the assets account (the assets account is credited because that particular asset has been sold) and the accounts receivables is debited (this is the account that records transactions for which payment is expected at a later date). In most cases, payment is not made immediately as in a regular cash transaction, therefore, the need for recording payments that are owed to the HOA.
Once payment is made for the asset, the accounts receivable is credited (to reduce its balance because the debt has now been cleared) and the cash account is debited (to increase the balance because the cash has been received).
In the case of monthly dues owed by members, the accounts receivable is debited (balance increased) for members that are yet to pay their monthly dues, and it is credited (balance reduced) for members that have paid their dues in advance. The cash account is then debited/credited appropriately as payments are received.
2. Cash-based HOA Record Keeping
The cash basis of financial records income and expenses when the cash is received, as opposed to when the transaction is made. The cash basis does not involve the use of accounts receivables. The cash account is simply debited when the cash is received (for example from member dues), and it is credited when cash is reduced (for example when paying expenses).
The disadvantage of this method is that it can be difficult to keep track of all the transactions for which payment is pending to the HOA or to which the HOA owes money. It is also not possible to compare the values of these transactions to the final balance sheet prepared at the end of the period in order to verify accuracy.
3. Modified
The modified basis (also referred to as modified accrual basis) is a combination of the cash and accrual basis of finance management. In this method, revenues are recorded when earned (just like accrual) but expenses are recorded when paid, rather than when incurred (just like cash basis).
This reporting method has the effect of having your accounts receivables accurate and up to date at all times while having your unpaid expenses pending to be recorded (therefore not present on the balance sheet) until the payments are made.
A modified method is deemed appropriate for preparing interim financial reports for the HOA as you wait to make all payments for expenses that the HOA has incurred. Many HOA finds it easier to record revenues when earned but to wait to record their expenses until they have made the payment.
Which Accounting Method Is Recommended for HOAs?
The recommended accounting method for Homeowners Associations (HOAs) is typically the accrual basis accounting method. This method provides a more accurate and complete picture of an HOA’s financial health. Under accrual accounting:- Income is recorded when it is earned (not when cash is received).
- Expenses are recorded when they are incurred (not when they are paid).
This allows HOAs to track all financial obligations and revenues in the period they relate to, which is essential for long-term financial planning and budgeting. It also complies with Generally Accepted Accounting Principles (GAAP) and is often preferred by auditors and financial institutions.
In some cases, smaller HOAs may use cash basis accounting due to its simplicity, where income and expenses are recorded only when cash changes hands. However, the accrual method is generally recommended for HOAs with more complex financial activities.
Successful HOA Bookkeeping
Ensure your HOA's finances are in expert hands with RealManage’s reliable financial management services. Our accurate and timely financial reports provide full transparency, empowering your board to make informed decisions with confidence. Contact us today to streamline your community's finances!
