HOA Financial Statements Example

financial statement

When it comes to your HOAs monthly, quarterly, and yearly financial statements, the outcome is largely dependent upon which type of accounting method is used by your HOA. There are three different types of accounting methods that can be utilized which are often determined by the size of the organization or by state and local regulations.

The three accounting methods are outlined below as well as examples of how this will affect your HOA financial statements at the end of each quarter and year.

 

Accrual Basis Method

The accrual basis method is the accounting method by which both expenses and income are recorded at the time of service rather than at the time that money actually changes hands. This method is generally preferred among homeowners associations because the financial reports are much more detailed.

Financial Statement: The quarterly and yearly financial statements under the accrual basis method are split into three detailed reports, all of which must be compared back to the balance sheet for accuracy. These reports are the Aged Assessments Receivable, which outlines outstanding balances that remain unpaid by homeowners, Prepaid Assessments, which shows amounts that were paid ahead of time by homeowners, and Accounts Payable reports, which give a report of all of the invoices that remain unpaid by the association at the end of each period.

 

 Cash Basis Method

The easiest way to think of the Cash Basis method is to think of how most people conduct their own personal budgets. All expenses and incomes are recorded at the moment that money changes hands rather than at the time of service. This method may work better for very small organizations who dont have enough income or expenses to use the Accrual Basis Method. However, its use is sometimes discouraged as it is not compliant with GAAP.

Financial Statement: The financial statement that is produced at the end of each period under this system is much smaller and much more concise when compared with the Accrual Basis Method. The balance sheet will not reflect the Aged Assessments Receivable, the Prepaid Assessments, or the Accounts Payable, simply because amounts are not on the balance sheet that can be compared to these amounts.

 

Modified Accrual Basis Method

A combination of the two methods is the Modified Accrual Basis method. In this method, expenses are recorded when paid out, while income is recorded at the time of service rather than when money is exchanged. Although also not in conformance to GAAP, the method is usually thought of as a viable option and a good middle ground.

Financial Statement: As with Accrual Basis Accounting, the income report will include Aged Assessments Receivable, Prepaid Assessments, and Accounts Payable, all of which will be reflected on the Balance Sheet. However, the expenses will not be reflected since they are recorded on a cash basis.

It can be difficult to decide which method should be used in your HOA. If the Accrual Basis method can be used, this is generally the preferred way. It is always important to carefully consider your options for the health and benefit of your community.