August 19, 2021 - BY Admin

Maintaining Balance on Your Balance Sheet

Accounting, specifically understanding the balance sheets, is difficult and unfamiliar territory to most people. To make matters more confusing, an HOA doesn’t function the same way a typical corporation would when dealing with balance sheets. So, we hope this article will help remedy some of the fear involved with going over the balance sheet. Remember, by employing a management company, you can always ask your manager to teach you what to look at on your balance sheets.

Simply put, the balance sheet shows your community’s financial situation at any given moment via assets, cash, and debts owed.

What can make balance sheets for HOAs hard to understand is whether or not the relationship between the HOA and its members is understood. Members of an HOA do have control over specific communal property assets within the community. After all, one of the core reasons the HOA even exists is to help manage these items.

In a typical corporation, when an item or asset is in need of building, replacement or repair, the value of the corporation doesn’t change. It has simply turned the cash spent into an asset with assumed value of what was spent. The corporation’s balance sheet then shows that the value is still the same, it’s just adjusted the value of cash and assets to display where the value of the corporation is in its entirety.

Unfortunately, this isn’t the case with an HOA.

HOAs only manage assets for a community, they don’t own or have direct control of them. So when an asset is in need of building, replacement, or repair for a community, the cash that went towards that asset isn’t represented by that asset on the balance sheet like it would be with a typical corporation.

However, this isn’t to say that an HOA doesn’t own some community items, like furniture and electronics in communal areas. These are the items that should be represented on a balance sheet as assets.

For an asset to be owned by the HOA and not its members, the HOA must hold the title and be able to make changes to or get rid of the asset entirely without a community vote.

As you can see, there are some differences when it comes to managing a balance sheet for an HOA compared to a typical company. However, with these differences kept in mind, maintaining finances isn’t nearly as daunting of a task as it might seem.

Cash or Accrual Accounting?

Even though Nevada HOA's are required to use accrual-based accounting, we thought it'd be worth exploring what it means to use accrual-based accounting and how it compares to cash-based accounting. First, let’s take a quick look at what the two different types of accounting are:

1.       Accrual Accounting:

Expenses are added when incurred and not when paid, and money is added when earned and not received.

2.       Cash-based Accounting:

Money is added and removed as it is literally received and expensed.

Which one makes the most sense for your HOA?

Accrual accounting is the way to go. In fact, just about all HOAs operate on accrual accounting and are even required to do so by state law, depending on the size of the HOA.

You’re probably wondering why cash-based accounting is a no-go for HOAs, which is understandable. On the surface, it seems to be the most straightforward approach to working with money. In general, it provides a pretty good idea of where the community finances are on a day-to-day basis. However, accrual accounting provides a much more complete idea of the overall financial health of the community. Here’s why:

1.       Deprecation

Cash-based accounting only allows for the acknowledgment of the face value of the item at the time of its purchase. With accrual accounting, an item that the HOA has purchased can continually be written off each subsequent year at its deprecated value as long as the item is still in use.

2.       Looking to the Future

Cash-based accounting offers no way of taking into account bills that have not yet been paid. Accrual accounting allows an HOA to factor in the bills that have not yet been paid, so that the HOA will never make the mistake of assuming it has more readily available funds than it truly does. This knowledge can help the community plan for expenses, projects, and maintenance.

3.       Unpaid Debts

Unpaid debts do not show up on the ledger in a cash-based accounting system. With accrual accounting, the debt is accounted for in the books with or without receiving payment. This allows the community to keep track of unpaid debts much more successfully and also allows the HOA to gauge whether or not they are adequate at collecting on those debts in a timely fashion.

So whether or not your state requires accrual accounting, the choice is clear. While it may not be the easiest or most straightforward system at first glance, accrual accounting will help your community succeed at a much higher rate when it comes to managing finances.