HOA accounting is an integral part of managing a homeowners association. It ensures financial statements are accurate and up to date. Its primary objective is to help HOA communities attain financial stability and success.
However, tracking financial records can be tedious and challenging for most HOAs. After all, these associations comprise part-timers with multiple responsibilities. As such, HOAs often rely on professionals for their accounting needs. HOA accountants employ various strategies to analyze and prepare financial reports. Here is a breakdown of the three methods of HOA accounting.
1. Accrual HOA Accounting
The accrual basis of accounting provides a comprehensive breakdown of the HOA’s financial health. It records revenues and expenses as they occur via Generally Accepted Accounting Principles (GAAP). It reports revenues when earned and not received and expenses when incurred rather than paid.
This HOA accounting method produces three different reports:
- Accounts Payable – financial records of incurred but unpaid expenses
- Prepaid Assessments – financial records of advance payments by HOA members
- Aged Assessments Receivable – financial records of outstanding balances that members owe the association
Most states recommend the accrual basis of accounting as it is one of the most superior HOA accounting methods. It produces detailed reports with daily, weekly, and monthly financial records.
2. Cash HOA Accounting
The cash basis of accounting records revenues and expenses when received and paid, respectively. It reports financial transactions after the exchange of cash, hence its name. Unlike the accrual HOA accounting method, the cash basis of accounting does not report accounts payable, aged assessments receivable, and prepaid assessments on the balance sheet.
The only concern is that verifying financial statements is tricky, and generated reports are prone to discrepancies. Moreover, it doesn’t adhere to Generally Accepted Accounting Principles (GAAP).
3. Modified Accrual HOA Accounting
The Modified Accrual basis is one of the most diverse types of HOA accounting, combining the principles of the cash and accrual basis of accounting. It reports revenues when earned, similar to the accrual method, and expenses when paid, identical to the cash basis of accounting.
Like the cash basis, the modified accrual method does not conform to Generally Accepted Accounting Principles (GAAP). However, it reports aged assessments receivable and prepaid assessments on the balance sheet. Amounts under accounts payable will differ since the modified accrual method follows the cash basis of accounting when reporting expenses.
Select the Ideal Accounting Method for Your HOA
All three methods of HOA accounting have their upsides and downsides. Abel Accountants can help you choose the appropriate accounting method for your HOA. We specialize in homeowners association accounting services in Georgia and Florida. Contact us today for more information on our services.