Being part of an HOA’s board of directors is a great way to stay involved in the lives and development of your community. Though there are plenty of routine administrative tasks, board members often shy away from accounting due to its perceived complexity. While CPAs often handle bookkeeping responsibilities externally, it still pays for all members to understand some fundamental financial concepts that will help maintain their organization’s fiscal health!
Every homeowner’s association board has the critical responsibility of protecting the financial well-being of their community. However, you don’t need to be a CPA or know much about bookkeeping; that expertise can often come from an outside professional – but it is still important for each member to gain understanding and familiarity with some core accounting principles.
HOA Accounting Cannot Be Taken For Granted
Accounting is critical to the success of an HOA, so the Board of Directors must understand top-notch accounting is required. Board members need to be aware of the dangers associated with improper HOA accounting. Overextending financial resources, compromising cash flow stability, and making decisions without accurate records could all lead to disastrous results for your organization!
Accounting errors can be costly: Not only could they diminish the financial health of your association, but members might even seek legal action against board members. While state laws and governing documents may provide some protection in cases like this, court rulings have been known to hold parties responsible for any HOA accounting mismanagement and poor economic decision-making. That’s why it is so essential that HOAs remain vigilant when managing their finances!
Which of the 3 Types of Accounting Will Your Board Adopt?
With three distinct accounting methods to choose from, it’s essential for HOA board members to be informed of their chosen approach. Learning the ins and outs of each method can help boards make smart decisions when managing finances and resources!
Cash Basis: Stay in the know with your HOA finances! Utilizing this approach, keep track of money coming and going through accurate recordkeeping.
Accrual Basis: With the HOA’s accrual-based recordkeeping approach, your financial statements will always be up-to-date and accurate. All income earned and expenses encountered are tracked with distinct line items for receivables and accounts payable, ensuring you know exactly where each dollar of yours is going.
Modified (Accrual) Basis: In this model, the HOA will be smart with their money through a “cash-in/cash-out” system of accounting: Expenses are reported on the basis that cash is received and revenue accrues over time.
Are you an organization looking to make a change? We can guide your HOA through the process and determine which method best suits their needs!
HOA Required to Prepare Timely Financial Reports
Every month and year, savvy HOA managers must prepare a variety of financial reports based on both their association’s accounting regulations and GAAP standards. These detailed summaries include income statements, balance sheets, cash flow analyses – plus other vital documents necessary for the success of an organization!
A balanced HOA is a happy one! Taking an in-depth look at the balance sheet provides insight into how much money there really is and what assets are available. An ideal report shows that liabilities, owner equity, and assets all come to the same amount—a visual indication of financial stability.
An HOA general ledger serves as the foundation of all financial reports, acting like a road-map: highlighting every accounting transaction in numerical order based on the accounts listed. Building off this roadmap, detailed and comprehensive insights into your association’s finances can be found!
Accurately and timely tracking of the HOA’s finances is essential to maintain financial stability. To achieve this, reports like an accounts payable report, cash disbursement record, delinquencies register and any other necessary documents should be regularly generated according to needs of the association as well as those outlined in its bylaws or from a specialist accountant/bookkeeper!
HOA Board Members Need to Follow Best Practices Listed Here
Managing an HOA’s finances can be a daunting task, so it pays to have some tools in the tool belt! Following these best practices provides boards with the groundwork necessary for successful financial oversight. These include:
- Knowing the ins and outs of state taxation can give you a financial edge – brush up on your understanding of local regulations to get ahead!
- A well-defined chart of accounts ensures that all income and expenses are assigned precisely, leading to greater insight into financials. Be as specific as possible for maximum accuracy!
- To maintain financial accuracy, it’s critical to ensure both credits and debits are logged correctly. Taking the time for a double check on every transaction is essential in preserving fiscal integrity.
- Effectively managing your HOA funds is essential for maintaining a secure financial position. Monitor income and expenses closely to prevent unexpected problems or unpleasant surprises down the road!
- To protect the HOA’s financials and security, it is crucial to establish strong internal controls that guard against fraud or embezzlement. Implementing these systems can help keep funds secure and safeguard your organization from nefarious activities.
Don’t Get Audited – Minimize Your Risk
For a homeowners’ association, keeping up with good accounting practices is essential–but it doesn’t stop there. If the HOA has to certify its records or meet any of its own bylaws and government requirements, an independent audit from a certified accountant can provide valuable peace-of-mind that all legal protocols are met. That’s why routinely checking your financial statements and involving qualified third parties for assessments is key in efficiently managing an HOA!
HOAs need to be ready for any financial situation, even the tricky ones. For entry into unchartered waters such as when an association member goes bankrupt or if you’re experiencing an IRS audit, CORE can provide advice and guidance on navigating these delicate accounting matters.
Homeowners associations rely on a healthy financial picture for success. To ensure the board can keep things running smoothly, each HOA member should make it their duty to gain an understanding in all five key facets of accounting that are essential for any organization’s long-term prosperity.
Our HOA accounting services provide exemplary guidance and assistance to your Board of Directors, allowing them to effortlessly fulfill their financial duty. We have the know-how that no board should be without – so contact us today for any questions regarding compliance or other issues pertaining to managing an efficient, effective budget!