When you’re running a homeowner’s association (HOA), you’re responsible for maintaining community amenities and common areas. And to do so effectively, you need a solid understanding of HOA accounting best practices. You’ll be collecting dues and assessments from homeowners and will need to track your HOA’s expenses, revenues, and equity. You’ll need to make sure there’s enough in the reserve fund to cover the cost of repairs and maintenance to common areas like the pool and gym, the roof, or the community center.
When there isn’t enough money for maintaining common areas, you’ll have to ask for larger assessments, and homeowners don’t like paying large, unexpected bills – who does?
To operate an HOA successfully, there is a need for you to keep accurate and detailed accounting records. Such records will clarify your HOA’s financial health, and help you understand where all of your HOA’s money is going and how much is left in reserve and operating funds to handle regular expenses, repairs, and maintenance. Let’s take a closer look at what HOA accounting requires.
Know Your Accounting Terms
If you’re completely new to accounting, it’s best to get the help of a professional accountant who can help balance your books and help you make the most of your organization’s HOA management software. But even if you have a professional accountant doing your books, you need to know the basics of HOA accounting, so you can understand your organization’s finances.
For example, you should familiarize yourself with standard accounting terms, like:
- Assets or the cash and investments your HOA holds;
- Equity, which refers to the monetary worth of your HOA;
- Balance sheet, which should be prepared to compare your organization’s assets to its liabilities;
- Income statement, which records income for the period in question;
- General ledger, which is the document in which all transactions are recorded; and
- Accounts payable and receivable reports, which record your HOA’s unpaid debts and the monies that are owed to it, respectively.
Understanding these important terms will help you better understand your HOA’s revenues, assets, liabilities, and equity.
Budget Carefully
Most HOAs use the standard costing method of budgeting, in which the cost of each expected expense is multiplied by the number of times you expect to pay that expense over the coming year. Preparing a budget helps you estimate your costs for the year ahead, but you should also keep track of your actual expenses and how they compare to your prepared budget.
Usually, such records are referred to as “budgeted vs. actual” records, and they can help you see where your budget is falling short. New budgets should be prepared several months before the start of the year to which they’ll be applied and should be approved by the board at least 45 days before the start of that year.
Balance the Books
You may need the help of a professional accountant to make sure your books are properly balanced, but it’s well worth the expense. Your HOA’s finances can be considered balanced when the organization’s assets are equal to its liabilities plus its equity. Balancing your books each month ensures that you’re not spending more than you receive, which is the main goal of HOA accounting.
Your association’s equity plus its retained earnings should be a net positive. You should use the accrual basis of accounting, in which income and expenses are recorded in the ledger as they are earned or incurred, respectively.
Perform Regular Audits
Audits ensure that everything is on the up and up with your HOA’s bookkeeping, and they usually require the assistance of a certified public accountant (CPA). You may not need to perform an audit every year — many HOAs only perform audits every two or three years.
Your state and local laws may provide guidance on how often to perform an audit, just as they may also provide regulatory requirements regarding your accounting method and the use of your funds.
Each Month, Prepare Your Reports
You need to prepare specific accounting documents each month so that the board can better track expenses and revenues. These reports include the balance sheet, which compares your association’s assets and liabilities and should provide a picture of your HOA’s net worth. You also need to prepare an income statement, which provides a picture of your revenues, expenses, and net income or loss for the month.
The cash disbursement ledger provides a record of all payments issued during the period, while the accounts payable and receivable reports depict the HOA’s unpaid debts and any monies owed to it, respectively. Make sure you use specific categories for listing expenses and revenues and be consistent with your account terms from one month to the next. Ideally, you should settle on your account names in advance, especially because you may not pay every expense or receive every form of revenue each month.
Final Note
Operating an HOA successfully requires a deep understanding of HOA accounting best practices. Unless you’re an accountant yourself, you’ll need professional assistance with at least some aspects of your HOA accounting – but learning the basics of HOA accounting can help you better understand your association’s finances, and help you be a better steward of your community.
Before you go, you might also want to check out this post about some reasons every business owner needs to get their accounting and finance right.
