There are several schools of thought on what method of
accounting is the best for condominium and homeowner associations. Before deciding
on the accounting method, the association should look at the make up of the
finances. Asking important questions upfront on whether the association is to
employee an accountant/certified public accountant (CPA), management company or
perform the book recordings on their own is always a great starting place.
Considerations that financial statements for FHA approvals, Fannie Mae Project
Submissions, bank loans, and a host of other needs are required to be in the
Accrual Method of Accounting.
Management companies do not always use an accountant or CPA.
Questions need to be explored when choosing the management company on what
rules are in place to assure that the accounting is compliant with governmental
regulations. All accounting files must comply with US General Accepted
Accounting Practices in order for the financial statements to be considered
valid.
Accounting method choices involved the following selections:
Cash Method, in simple terms, is when association income is
recorded when received and bills are recorded when paid. As the simplest method
of accounting, the Cash Method does not consider liabilities or obligations of
the association. Most tax returns are completed on the Cash Accounting Method.
Modified Accounting Method (also known as a hybrid
accounting method, modified cash or modified accrual methods) is a mix of the
cash and the accrual accounting methods. The income and expenses are recorded
at the time received or paid and the obligations and liabilities of the
association are also extrapolated out. The Modified Accounting Method is
misleading to some reviewers, as income is often inflated while expenses are
held for finalization of payment. A large number of management companies use
the modified accounting method for their monthly reports.
Accrual Accounting Method uses transactions as the primary
way of monitoring the finances. In this method, income and expenses are fully
recorded at the time incurred regardless of the cash position. The receipts of
incomes or payments of expenses is not a factor in this accounting method. The
method shows the liabilities and obligations of the association. A Cash Flow
Statement is usually provided to define the current cash movements of the
organization. The accounting method is often the most complicated and for some,
the most beneficial method of accounting. Financial Statements for banking
loans, project reviews, and other official business are required to be in the
accrual based format.
Use of a hybrid model, a normal management company preference,
gives a snap shot of both the cash and the obligations/liabilities. We
recommend that instead of the Hybrid Model that a Balance Sheet, Profit and
Loss Statement be given to the Board. A simple comparison of the cash financial
statements will explain the "nuts and bolts" of the cash flow to the
Board of Directors. The obligations/liabilities reviewed through the accrual
based financial statements will provide the Board the consistency of both the
cash movement and the obligations/liabilities. This will allow the Board to see
the complete financial profile of the financial health of the association.
Overall, understanding the financial of the association is
imperative for the Board of Directors. Failure to keep up the "bottom
line" will impact the future health of the association, owners, and the
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