HOA accounting plays a crucial role in managing a homeowners association’s finances. Board members must understand financial reports and accounting methods to ensure proper financial management. Without accurate accounting, an HOA risks financial instability, legal issues, and loss of homeowner trust.
The Importance of HOA Accounting
Homeowners associations rely on dues and assessments to maintain common areas, fund reserves, and cover operational expenses. Proper homeowners association accounting helps make sure that boards manage these funds responsibly. Without accurate financial records, an HOA may struggle with unpaid fees, budget shortfalls, or mismanagement.
Additionally, good HOA accounting practices help prevent fraud and financial mismanagement. They also ensure compliance with state laws and governing documents. Homeowners have a right to know where their money is going, and clear financial reporting helps with that.
Basis of Accounting for HOA
There are three HOA accounting methods: cash basis, accrual basis, and modified accrual basis. Let’s break them down below.
1. Cash Basis Accounting
With cash basis accounting, transactions are recorded only when money changes hands. The HOA records income when it receives payments and expenses when it makes payments.
This method is the simplest, but it has its limitations. It does not track unpaid invoices or outstanding dues. This makes it harder to see the HOA’s actual financial position at any given time. Since it does not account for pending expenses, it may give a misleading view of financial health.
2. Accrual Basis Accounting
With accrual basis accounting, the HOA records income when it is earned and expenses when they are incurred. This happens even if the money has not yet been received or paid.
For example, if an HOA bills homeowners for regular dues, the income is recorded immediately, even if the association has not collected the payments yet. Similarly, when the HOA receives an invoice from a vendor, the expense is recorded immediately, even if the vendor has not yet paid the bill.
Due to the nature of this method, accrual accounting provides a more accurate financial picture. It helps HOAs plan budgets effectively and avoid surprises. Because of this, it is the preferred basis of homeowner association accounting.
In Illinois, 765 ILCS 160/1-45 states that HOAs subject to the Act and consist of at least 100 units must use Generally Accepted Accounting Principles (GAAP). The accrual method of accounting is the only one that is compliant with GAAP.
3. Modified Accrual Basis Accounting
With modified accrual basis accounting, the HOA follows the accrual method for income and the cash method for expenses. This means revenue is recorded when earned, but expenses are only recorded when paid.
This method offers a balance between simplicity and accuracy. It provides a clearer financial picture than cash accounting while avoiding the complexity of full accrual accounting. Some small HOAs prefer this method, but most professionals still recommend the accrual method.
HOA Financial Statements to Know
Financial statements provide insight into the association’s financial health and play a crucial role in HOA accounting. Board members can use these statements to help with decision-making. While it is generally the treasurer’s job to prepare these statements, many HOAs enlist the help of an accountant or an HOA management company for this task.
Here are the key financial statements important to an HOA.
1. Balance Sheet
The balance sheet provides a snapshot of the HOA’s financial condition at a specific point in time. It consists of three key components:
- Assets. These refer to cash, investments, accounts receivable, and any owned property.
- Liabilities. These are the outstanding debts, unpaid invoices, and future financial obligations of the association.
- Equity. The refers to the HOA’s net worth, including reserve funds and retained earnings.
The balance sheet must always balance out using this formula:
Assets = Liabilities + Equity
2. Income Statement (Profit & Loss Statement)
The income statement details the HOA’s revenue and expenses over a specific period. It follows the formula below:
Total Income – Total Expenses = Net Income (or Loss)
This report helps the board track whether the HOA is operating within budget. It also shows if regular dues are enough to cover expenses. If not, the board will need to adjust its budget.
3. General Ledger
The general ledger is the master record of all financial transactions. It includes every income and expense entry, categorized by account type. Because of its contents, the general ledger also serves as the foundation for all financial reports. For this reason, it is important to immediately correct any errors to ensure accuracy.
Each transaction in the general ledger consists of the following details:
- The date
- A description of the transaction
- The amount
- A reference to the associated account number
4. Accounts Payable Report
The accounts payable report lists all of the association’s unpaid bills and vendor payments due. This report helps the board manage cash flow and avoid late fees. The board must review accounts payables regularly to ensure timely payments and maintain good working relationships with vendors.
The accounts payable report includes the following information:
- The names of vendors
- Payment terms
- Outstanding amounts owed
5. Account Delinquency Report
The account delinquency report tracks homeowners who have unpaid fees. Most reports classify overdue accounts into categories: 30, 60, 90, or 120+ days past due. This report helps the board keep track of delinquencies and enforce collection policies. In turn, the board can make sure that the HOA doesn’t run into a financial shortfall.
The account delinquency report typically includes the following:
- Homeowner’s name
- The amount due
- The number of days overdue
6. Cash Disbursements Ledger
The cash disbursements ledger tracks all outgoing payments, including checks and cash transactions. This ledger helps board members monitor spending and ensure all payments are accounted for. It is essential for financial transparency and tracking HOA expenses.
Each entry in the cash disbursements ledger includes the following details:
- The date of payment
- The payee
- A description of the expense
- The amount
How Often to Prepare Financial Statements
Typically, an HOA must prepare and update financial statements every month, with the exception of the general ledger. The general ledger must be updated more regularly (daily or weekly) since it is a record of all financial transactions. Annual financial statements, which cover the financial period for the year, are also customary.
Board members should review these financial statements often. In doing so, they can monitor cash flow and expenses. These financial statements also help the board make informed financial decisions.
Who Should Receive HOA Financial Statements?
The financial statements of an HOA should be made available to the HOA board and the homeowners. Third-party professionals, such as the HOA manager, accountants, and auditors, also usually receive a copy.
Board members must be able to review the financial statements to make better decisions for the HOA. Homeowners, on the other hand, have a right to review financial records. According to 765 ILCS 160/1-45, the board must share a clear summary of the association’s income, expenses, and reserves from the past budget year with all members.
Additionally, members should have access to a detailed breakdown of actual expenses, including what was spent on reserves, capital projects, repairs, and real estate taxes. This report will also show how much was collected through dues and whether there was a surplus or deficit. Alternatively, the board may provide a consolidated annual audit report that gives an independent review of the association’s financial status.
It is worth noting that some financial records may be confidential. These include individual homeowner accounts.
The Role of the HOA Treasurer
The treasurer is generally responsible for the accounting for a homeowners association. They oversee financial management, too. Their responsibilities include:
- Preparing and reviewing financial statements
- Managing bank accounts and payments
- Ensuring assessments are collected on time
- Overseeing the HOA’s budget and financial planning
- Coordinating audits and tax filings
The treasurer work must closely with the rest of the board to maintain financial stability. Of course, HOA accounting and financial management can come as a challenge, especially to inexperienced board members. Fortunately, the board can always hire an HOA accountant or management company to help out.
A Helping Hand
A lot of communities struggle with HOA accounting. Understanding the basics of accounting methods and financial statements will help board members fulfill their duties to their association. When in doubt, hiring an HOA management company can help greatly.
Hillcrest offers HOA financial management services to communities in Chicago. Call us today at 630-627-3303 or contact us online to request a proposal!
