Each billing cycle, homeowners are responsible for paying their common assessments (dues) to the association. Some associations bill each month, some quarterly, and others only once each year.
These assessments are entered into accounts receivable and counted as assets on the balance sheet. The association uses this money to pay utility bills and vendors by cutting a check or by ACH draft.
Each month, the bank account must be reconciled to the association’s records. The accounting firm will also provide regular financial reports to the Board of Directors to give a snapshot of the association’s financial health.
Once each year, a financial budget is constructed. This is a plan that guides the Board of Directors in spending the association’s money.
Sounds simple, right?
However, there are many other components that go into an association’s book keeping. Some states now require by law that an association keep a certain percentage of funds in a reserve account. Each year, the association must provide 1099 forms for vendors.
When it comes to community association accounting practices, there are two schools of thought:
Cash Method
When employing cash accounting, revenues and expenses are not recorded until they are incurred. In plain English, this means that your association’s landscaping bill does not appear on the records until a check is cut for payment.
Accrual Method
When employing accrual accounting, revenues and expenses are recorded as soon as they are incurred. For example, your association’s landscaping bill would show up on the records as soon as the service was provided, regardless of when the check is cut.
Community association management companies can use either method. However, the accrual accounting system has been generally accepted as more accurate.