Board members must understand the basics of HOA accounting. After all, accounting plays a crucial role in a community’s financial stability, but not many HOA leaders know the first thing that goes into it.
The Importance of HOA Accounting
Accounting is the foundation of any strong organization, including homeowners associations. Proper accounting helps HOAs track their income and expenses. It ensures that they collect dues on time and allocate funds appropriately. An HOA may have trouble with budgeting and financial planning without accurate accounting records.
Homeowners association accounting also helps maintain reserves. The reserve fund is critical for long-term maintenance and repairs. Accounting helps ensure that the HOA calculates its reserve contributions accurately. Without proper accounting, an HOA could have underfunded reserves, eventually forcing the association to levy special assessments or take out a loan.
Proper accounting also assists with budget preparation. An HOA board is responsible for preparing the annual budget, and detailed financial records allow board members to use historical data to create realistic budgets.
Additionally, good accounting practices help prevent fraud and financial mismanagement. Without checks and balances, there is a higher possibility of financial crimes and discrepancies as no safeguards exist.
Finally, HOA accounting promotes transparency and accountability. With clear financial records and reports, homeowners can understand how the HOA uses their dues. It builds trust between the members and the leaders.
Accounting Methods of HOA
There are three methods of accounting: cash basis, accrual basis, and modified accrual basis. Board members must understand the differences between these three methods so that they can choose which one suits them best.
Here are the HOA accounting methods to know.
Cash Basis
With cash basis, revenues and expenses are recorded when they are received and paid, respectively. The main benefit of cash accounting is that it’s easy to use. It gives HOA boards a clear picture of cash flow. It also doesn’t require a lot of accounting knowledge or experience.
That said, due to the timing of the recording, cash accounting doesn’t show outstanding receivables or liabilities. It can give boards a distorted view of the association’s financial health.
Accrual Basis
With accrual basis, revenues are recorded when they are earned. Similarly, expenses are recorded when they are incurred. It doesn’t matter if money has yet to change hands.
Accrual accounting provides a more accurate picture of the association’s financial health. It matches the income and expenses in the same period. The disadvantage of this accounting method is that it is more complex, so board members should have more accounting knowledge to accomplish it.
It is worth noting that the accrual basis of accounting is the only one that complies with Generally Accepted Accounting Principles (GAAP). While Texas law doesn’t require compliance with GAAP, some associations’ governing documents might.
Modified Accrual Basis
Modified accrual accounting is a combination of the cash method and the accrual method. This type of accounting uses the cash basis for revenue (recording when cash is received) and the accrual basis for expenses (recording when expenses are incurred).
Modified accrual accounting shows outstanding expenses while making it easy to record revenue. As with cash basis, modified accrual basis offers a less accurate view of the HOA’s financial health. Since the revenue follows the cash basis, there could also be discrepancies.
Options for Accounting for HOA
Homeowners associations must decide how to handle their finances. They have the option to hire an in-house accountant, work with an HOA management company, or use specialized accounting software. Of course, each option has its advantages and drawbacks. Since there is no right answer, the decision is entirely up to the HOA board.
Independent HOA Accountant
Many accountants offer their services to homeowners associations. Some HOAs choose to employ a dedicated accountant or an accounting firm. There are also accountants who work part-time or full-time.
The main advantage of an in-house accountant is that they have direct oversight and control of the HOA’s financial records. An HOA can also benefit from their expertise when it comes to handling dues, reserves, and tax filings. With an in-house accountant, an HOA can ensure better transparency and accountability.
On the other hand, the main drawback of in-house accountants is that they tend to be more expensive. Homeowners associations must pay them a salary and benefits, and there are also insurance considerations to consider. For smaller HOAs, hiring an in-house accountant may not be financially wise or feasible.
Additionally, the board of directors must oversee the accountant’s work to prevent fraud. A single dedicated accountant may also have difficulty juggling all the work and records for larger communities.
HOA Management Company
Homeowners associations can choose to hire an HOA management company. Management companies often offer accounting services as part of their packages, and some even offer accounting and financial management services exclusively. As with in-house accountants, HOA management companies handle dues, budgeting, financial reporting, and tax preparation.
One of the most obvious benefits of hiring an HOA management company is access to their resources. Many companies have accounting departments with a staff of trained and certified accountants. These accountants have professional expertise and industry experience. Plus, HOA management companies typically use specialized accounting software that doesn’t require direct setups.
Board members can expect a reduced workload with an HOA management company. Some management companies also offer regular audits, which help prevent fraud and boost accountability.
On the cons side, hiring an HOA management company can be costly, especially for smaller HOAs. There is also less direct control over the association’s finances, and board members have to rely on the management company for day-to-day bookkeeping.
Finally, there is a risk of financial mismanagement. When finding an HOA management company, boards can easily sidestep this by using a rigorous and comprehensive selection process.
Accounting Software
If board members already have a basic understanding of HOA accounting, they can use specialized software. Many accounting programs nowadays make it easy to automate financial tasks and bookkeeping. Some are free, while others require a fee.
Cost is a chief benefit of this option. Accounting software is more affordable than paying an accountant or management company. Board members can use the software to automate invoicing and payments, generate financial reports, and access financial data anytime.
The downside of accounting software is that it requires a more hands-on approach. Board members must manage the system themselves, entering data and updating records. There is less direct involvement with an accountant or an HOA management company.
Board members can also make mistakes using the software if they lack an accounting background or expertise. Learning how to use the program may also take time, which can delay operations.
Know the Basics
No association can go without HOA accounting. Without knowledge of the basics, board members might inadvertently mismanage the association’s funds.
Preferred Association Management Company offers exceptional financial management services to Central Texas communities. Call us today at 512-918-8100 or contact us online to learn more!
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