Accounting Methods for Condominium and Homeowner Associations

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.

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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.

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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 property values. read more wealth planning