How to Put Together an HOA Budget Best Practices
hoa accounting best practices

HOA accounting is probably one of the most complex, and most important, responsibilities of the association board. Preparing financial reports on a regular basis is important for many reasons. They also promote transparency between the board and members or it can also be a law requirement. The frequency of preparation of HOA financial statements may vary depending on state laws, community bylaws, and the size of the association. In the planning phase of the audit, the auditor should review relevant documents, including bylaws, if any; the declaration for a condominium or HOA; or the corporate charter for a cooperative housing corporation.

Is QuickBooks good for an HOA?

HOAs can use QuickBooks to manage their finances effectively, including invoicing, bill payments, and budgeting. QuickBooks offers a user-friendly interface that allows HOAs to easily record transactions and generate financial reports.

Similar to a property manager, the board is responsible for funds, requiring insurance to cover liability, errors, and omissions. The good news is board members don’t have to try to figure things out on their own. HOAs have the option to hire a professional, such as an HOA management company that specializes in finances, or a certified accountant, to help them maintain the financial health of their community. Moreover, they can apply some top accounting practices, which we will cover in this article.

Setting Up your HOA Accounting System

As such, you must record expenses when they are paid and actual cash is tendered, regardless of when they are incurred. Homeowners who refuse to pay dues or comply with community policies are subject to fines, restriction of community privileges, litigation, liens, or even incarceration for so much as a landscaping violation. If non-compliance results in an HOA lien, it can be difficult or impossible to sell a home until cleared. Some duties seem simple from the outside, but there’s a lot of administrative heavy-lifting that maintains a healthy community. Most HOA boards bring in a  property manager to assist with day-to-day operations.

Which method of accounting is the best method to use?

The best method of accounting will depend on your business' size, financial situation and context. If you're a large company, accrual accounting is more ideal because it provides an overview of all incoming revenue. In contrast, small businesses with simpler needs may prefer cash-basis accounting.

Accordingly, boards members must take the roles and responsibilities of HOA management seriously. When HOAs run into trouble, it’s often because board members are neglecting their duties—not understanding the role of a board member and not having a working familiarity with the governing documents and relevant governmental regulations. Whether it’s the volunteer status or the fact that you’re dealing with friends and neighbors, it can be easy to forget that a board member’s responsibility is to put the HOA’s interest above his or her own interest. Following these best practices will go a long way to getting your board in the right mindset, empowering them to lead by example, and mitigating risk. A review includes everything described above in compilation, but also includes a more analytical look at your association’s financial records.

What Are the HOA Financial Statements?

A homeowners association doesn't always have the best stories to tell when it comes to HOA reserve fund accounting. This could be either your HOA management company or a Certified Public Accountant (CPA). A comprehensive audit involves the checking of records to ensure they comply with basic accounting principles. hoa accounting Therefore, it’s the only one you can use for official recording and reporting. If an Accounts Payable Report tracks your association’s debts, an Accounts Delinquency Report tracks amounts owed to the association. Let’s be honest — collecting monthly fees and assessments from homeowners can be tough.

hoa accounting best practices

In turn, these can help ensure you have enough funds available to keep the subdivision clean, safe, and comfortable. Cash Basis – Cash Basis means revenue is recorded when earned and expenses are recorded whenever they are incurred (e.g. when member pays late). When you use the accrual basis of accounting, all HOA financial activities will be reported on the homeowners association’s financial statements. Accrual accounting is respected because it provides the most complete picture of your HOA’s financial health and status.

What Is a Special Assessment?

The first method of accounting is the Cash Basis, which records income and expenses only when actual cash is tendered. Homeowners associations (HOA) have many responsibilities when it comes to protecting the assets of the community. Using the best accounting method for HOAs comes along with that engagement.

  • Yet, HOA accounting remains an integral part of your job as an HOA board member.
  • But, for the most part, HOA Board business is public information and it must be accessible to homeowners.
  • One of the most widely used substantive tests for determining the existence and accuracy of receivables is confirmation of the amount receivable by direct communication with parties owing amounts to the entity being audited.
  • Accounting is arguably one of the most challenging aspects of managing an HOA community.
  • Poor financial management can lead to dire consequences in the form of a shortage, unexpected assessments, or even bankruptcy.

Then, plan a yearly audit to review overall financial health and plan for next year’s budgets. By learning financial reports best practices for HOAs, you can ensure each client’s association is always in prime financial health. The best kind of financial reporting helps clients make sure they’re staying within their budgets, meeting all goal targets for the HOA’s reserve fund, paying vendor invoices on time, and more.

Receiving Help From Experienced HOA Financial Advisors

Additionally, properties with mortgages under Freddie Mac, FHA, and Fannie Mae governance are only required to have around 10% of the reserve funded. Using this method, accounts like “Assessments Receivable” and “Prepaid Assessments” will appear on the Balance Sheet. However, liability accounts like “Accounts Payable” will continue to be absent. If you have a separate Accounts Payable Report, you have no way of verifying the amounts against the Balance Sheet. On the other hand, when recording expenses, the timing follows the Cash Basis.

Before putting any of that into practice, however, you must first understand the three methods of HOA accounting and then learn about the best accounting method for HOAs. Lastly, the cash disbursements ledger lists down all of the checks your association has written and issued for the period specified. Otherwise known as a check register, this report consists of information such as the check’s recipient, the check date, and a description of the expense.

Make it so future board members can make sense of accounts

Communication is a cornerstone of effective leadership—not just the words you choose but the frequency, the medium, and how you take feedback. It can be helpful to remember that board members are unit owners just like every other resident in the community, and they were elected by their peers. If a unit owner believes that a board member is exceeding its authority, the remedy is to not reelect the board member. Many HOAs have less than stellar reputations because homeowners can feel they are too restrictive or unsupportive of the community’s residents. Often, that feeling stems from either party failing to read the governing documents before they choose to move in.

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