Reading Financial Statements Series© – Balance Sheet Part 6: FUND ACCOUNTING FOR ASSESSMENTS & EXPENSES

Reading Financial Statements Series© – Balance Sheet Part 6: FUND ACCOUNTING FOR ASSESSMENTS & EXPENSES

[ Blog/News ]

Reading Financial Statements Series© – Balance Sheet Part 6: FUND ACCOUNTING FOR ASSESSMENTS & EXPENSES

We introduced you to prepaid expenses as part of a balance sheet in our last blog, which was the fifth in our Reading Financial Statements Series©. In this blog we will explore typical association balance sheet fund accounting for assesments & expenses in more detail. 

Community associations use a system of accounting called fund accounting. As with non-profits and charities, the entity is collecting money for specific purposes, and should account for specific financial activity in pre-determined funds.
Fund Types

Most community associations levy assessments on members for two purposes:

  1. To pay for month-to-month expenses (Operating Fund).
  2. To save money to repair and replace common area components documented in its reserve study (Reserve Fund).

Thus, the typical association maintains two funds: Operating and Reserves.

Associations should maintain fund-specific bank accounts for each fund’s deposits and disbursements. The bank accounts should be labeled as operating and reserves on the association’s balance sheet.There should be no co-mingling of cash. Cash belonging to the operating fund should be maintained in operating fund bank accounts, and likewise for reserves cash.

Assessment Billing & Receipts

Having written above that associations should not comingle operating and reserve fund cash, the following may sound a little contradictory. The typical method of accounting for billing and collections, together with allocation of assessment revenue is to use the operating fund to account for assessment billing and receipts.

Most associations bill members monthly. Under the accrual basis of accounting, assessment revenues are recognized in the month members are assessed. A corresponding assessment receivable account is recorded to reflect the amount billed and collectible from members. Upon receipt of a member’s payment, the member’s receivable balance is decreased, while cash is increased.

Each month, in accordance with the association’s budget, the association contributes assessments from the operating fund to the reserves fund. After recording the contribution, the operating fund reports operating assessments only, and the assessments allocated to the reserves fund are reported as reserves assessments income.

Expenses

Associations should use operating cash to pay for operating fund expenses. Such expenses should be recorded in an operating fund expense category. Likewise, associations should only use reserve cash to pay for reserve fund expenses, and such reserve expenses should be recorded in a reserve fund expense category.

We will delve into more applications of fund accounting in future blogs. End Of Article

By Newman CPA

By Newman CPA

Chapter Happenings Sponsor, October 2021

By: Jeremy Newman CPA. Newman Certified Public Accountant PC.

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Reading Financial Statements Series© – Balance Sheet Part 5: PREPAID EXPENSES

Reading Financial Statements Series© – Balance Sheet Part 5: PREPAID EXPENSES

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Reading Financial Statements Series© – Balance Sheet Part 5: PREPAID EXPENSES

We introduced you to accounts payable & accrued expenses as part of a balance sheet in our last blog, which was the fourth in our Reading Financial Statements Series©. In this blog we will explore typical association balance sheet prepaid expenses in more detail. 

Another part of a financial statement deals with prepaid expenses. A prepaid expense is an expense an association has paid in advance. It is an asset of the association. The most common prepaid expense is an association’s annual insurance premium.
What Causes A Prepaid Expense To Occur?

Generally, prepaid expenses are recorded when an association has paid for something but has not yet received the benefit of the expenditure.

EXAMPLE: Prepaid Insurance

Let’s assume your association has a calendar year end (December 31). Your association’s insurance policy period runs from August 1 of the current year (CY) to July 31 of the next year (NY).  If your association pays the annual insurance premium of $12,000 in full on July 1, CY, how much will be recorded as an expense and a prepaid expense?

Since the annual premium is $12,000 and there are twelve months in the policy year, the expense for each month is $1,000 ($12,000 divided by 12 months). The expense for the current year will be for the period August 1 to December 31: five months. Five months at $1,000 per month equals $5,000 to be expensed in the current year.

What about the other $7,000 of our $12,000 premium?  We paid it all in the current year so why can’t we expense it all in the current year? The premiums paid this year that benefit the next year, through the end of the policy period on July 31, will be expensed next year. For this year, we need to account for the $7,000 that benefits next year as prepaid insurance expense and present the account as an asset on the balance sheet.

We ask the next question a lot because it is so important:

What Is Your Accounting Basis?
  • Cash Basis: Revenues recorded when cash is received, expenses recorded when paid.
  • Accrual Basis: Revenue recorded when earned/billed, expenses recorded when incurred.

Under the cash basis of accounting, the full $12,000 insurance premium would be recorded as an expense when the premium is paid. Using the accrual basis of accounting, the insurance premium is expensed in the current year ($5,000) and in the next year ($7,000) per the analysis above.

Full Accounting and Knowledge

We believe the full accrual basis of accounting provides associations and readers of financial statements with a more complete and accurate representation. End Of Article

By Newman CPA

By Newman CPA

Chapter Happenings Sponsor, September 2021

By: Jeremy Newman CPA, Newman Certified Public Accountant PC

Visit us online: www.hoacpa.com

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  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
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Reading Financial Statements Series© – Balance Sheet Part 4: ACCOUNTS PAYABLE & ACCRUED EXPENSES

Reading Financial Statements Series© – Balance Sheet Part 4: ACCOUNTS PAYABLE & ACCRUED EXPENSES

[ Blog/News ]

Reading Financial Statements Series© – Balance Sheet Part 4: ACCOUNTS PAYABLE & ACCRUED EXPENSES

We introduced you to receivables as part of a balance sheet in our last blog, which was the third in our Reading Financial Statements Series©. In this and following blogs we will explore more typical association balance sheet accounts payable and accrued expenses in more detail. 

Now we come to the part of a financial statement that deals with accounts payable and accrued expenses. A payable is something the association owes to another entity or person. It is a liability of the association.
What Causes A Payable To Occur?

Generally, accounts payables are recorded when an association has received goods or services, and the related vendor invoice, but has not yet paid the invoice.

What Is Your Accounting Basis?

In other articles and blogs, we have referred to the basis of accounting. This is very important for readers of financials to understand.

To recap:

  • Cash Basis: Revenues recorded when cash is received, expenses recorded when paid.
  • Accrual Basis: Revenue recorded when earned/billed, expenses recorded when incurred.

By definition, when using the cash basis of accounting, an association will not record a vendor expense until an invoice is paid.  What happens if a contract landscape invoice is submitted to the association for payment, but the invoice is not paid until the next month?

The association will not record landscape expenses in the current month under the cash basis of accounting. If an association uses the accrual basis of accounting, the landscape vendor invoice will be recorded as a payable, with a corresponding charge to landscape expense in the current month.  The expense is recorded together with the liability to pay for the expense.

Are Accrued Expenses Different From Accounts Payable?

Yes, technically accrued expenses are different, however the financial statement presentation is similar.  Typical accruals are recorded for expenses like utilities. Perhaps the utility company bills the association every two months.  At the end of month one, even though an invoice had not been received, the association should accrue one month of utility expense so that the financial statements present a reasonable estimate of the expense for the current month. If the association waited until it received the invoice for two months, it would be recording two months of expense in one month and zero expense in one month under the cash basis.

Full Accounting & Knowledge

We believe the full accrual basis of accounting provides associations and readers of financial statements with a more complete and accurate representation. End Of Article

By Newman CPA

By Newman CPA

Chapter Happenings Sponsor, August 2021

By: Jeremy Newman CPA. Newman Certified Public Accountant PC.

Visit us online: www.hoacpa.com

Read All Reading Financial Statements Series© Blog Posts:

  • HUB International NW - HOA And Condo Solutions - Web Ad
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • Rafel Law Group - Banner Ad
  • Porter Construction Inc - Building With Integrity - www.porterci.com
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Reading Financial Statements Series© – Balance Sheet Part 3: RECEIVABLES

Reading Financial Statements Series© – Balance Sheet Part 3: RECEIVABLES

[ Blog/News ]

Reading Financial Statements Series© – Balance Sheet Part 3: RECEIVABLES

We introduced you to cash as part of a balance sheet in our last blog, which was the second in our Reading Financial Statements Series©. In this and following blogs we will explore more typical association balance sheet accounts and receivables in more detail. 

Receivables are an asset which is generally presented just below cash on the balance sheet. It represents amounts the association has the right to receive. Receivables are amounts due from other people or entities.

Assessments

For associations, the largest and most common receivable is for unpaid assessments. Most associations bill owners for assessments each month.  If an owner has not paid their monthly assessment by the due date, the assessment is considered a receivable from the owner.

Recording assessments revenues on the accrual basis without considering the effect of delinquent accounts receivable can mislead readers of an association’s statement of revenues and expenses.

Assessments are recorded when billed under the accrual method. Should there be an accumulation of delinquent accounts, the statement of revenues and expenses will continue to present results assuming 100% collection of outstanding assessments. Readers should always refer to an aging report to assess the status of assessments receivable.

What If An Association’s Board Of Directors Thinks That Not All The Amounts Due To The Association Are Collectible?

It is important not to overstate assets in an association’s financial statements.

Consideration should be given to providing for an allowance for uncollectible receivables. An allowance for the total receivables that a board determines might be uncollectible should be presented below receivables on the balance sheet.

The net of the two amounts should indicate to readers of the financial statements the amount the board expects to collect.

Bad Debt Expense

When an allowance for uncollectible accounts is recorded on the balance sheet, a second account, bad debt expense, is recorded on the statement of revenues and expenses.

Recording bad debt expense helps boards and managers to understand the effect of not collecting all amounts that are billed, thus providing a more realistic bottom line. End Of Article

By Newman CPA

By Newman CPA

Chapter Happenings Sponsor, July 2021

By: Jeremy Newman CPA. Newman Certified Public Accountant PC.

Visit us online: www.hoacpa.com

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  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • The Copeland Group - Banner Ad
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Reading Financial Statements Series© – Balance Sheet Part 2: CASH

Reading Financial Statements Series© – Balance Sheet Part 2: CASH

[ Blog/News ]

Reading Financial Statements Series© – Balance Sheet Part 2: CASH

We introduced you to balance sheets in our last blog, which was the first in our Reading Financial Statements Series©. In this and following blogs we will explore some typical association balance sheet accounts in more detail. 

CASH! Everyone likes cash! Associations are no different. Without enough cash, association management and community property can become neglected, often leading to future major repairs requiring loans and special assessments. Understanding what activities have the most impact on cash balances is vital to the future success of an association’s operations. As managers and board leaders, it is so important to review cash activity and balances continuously. Be proactive in a timely manner. Not reactive two years down the road.

Cash includes petty cash, checking, and money market accounts. Remember from the last blog, assets represent what an association owns. We recommend a serious review of cash every month. Cash balances are going to significantly impact an association’s ability to pay for budgeted expenses. Not addressing near term cash challenges can result in current and future budget constraints and economic pressure on the association and its members, including surprise assessment increases. (Please refer to our article on budgeting which discusses assessment increases, at www.hoacpa.com). 

Assessment Collections:

If you have significant owner delinquencies, your cash holdings will be negatively impacted. We recommend that you review the accounts receivable balances in conjunction with a review of cash balances every month. As assessments receivable/delinquencies increase, you will usually see a decrease cash balances. Addressing reductions in cash received compared to budgeted revenues will help you to determine if you also need to work on reducing expenses. Know how much money is received each month.

Contributions Of Assessments To The Reserves Fund:

Associations budget for monthly contributions of assessments to the reserves fund. When associations do not make payments from the operating fund to the reserves fund each month because there is not enough money in operating bank account, the reserves fund will start to be underfunded. The association still has a liability to fund reserves per its ratified budget. Not funding reserves because of operating fund shortages will lead to significant cash pressures as major repairs and replacements are deferred and future special assessments and loans may be required to fund expenditures. End Of Article

We will continue to address various aspects of cash management and controls surrounding cash in future blogs.

By Newman CPA

By Newman CPA

Chapter Happenings Sponsor, June 2021

By: Jeremy Newman CPA. Newman Certified Public Accountant PC.

Visit us online: www.hoacpa.com

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  • Newman HOA CPA - Banner Ad
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  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • Rafel Law Group - Banner Ad
  • Barker Martin
  • The Copeland Group - Banner Ad
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  • Association Reserves of Washington - Ad
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Reading Financial Statements Series© — Balance Sheet

Reading Financial Statements Series© — Balance Sheet

[ Blog/News ]

Reading Financial Statements Series© — Balance Sheet

This blog, introducing you to balance sheets, is the first in our Reading Financial Statements Series©

What Is A Balance Sheet?

Balance sheets present the financial position of your association as of a certain date, usually the month or year end.

What Are The Classifications Of Accounts On My Association’s Balance Sheet?
  • Assets
  • Liabilities
  • Equity or Funds
Assets

What the association owns or owns the rights to, including:

  • Cash
  • Assessments and other receivables
  • Prepaid expenses
  • Deposits
Liabilities

What the association owes or is obligated to pay, including:

  • Accounts payable (unpaid vendor invoices)
  • Accrued expenses
  • Prepaid assessments
  • Deferred revenues
Equity or Fund Balances

The association’s net worth. Generally, represents the cumulative revenues minus expenses over the life of the association since its inception.

Basis of Accounting

One of my favorite topics is “What basis of accounting is used to present your association’s financial statements?” Some balance sheet accounts will not be presented on financial statements if your association presents its financial statements using the cash basis of accounting.

Being aware of what you are reading, as well as what may be missing from the balance sheet you are reviewing is important to your understanding of the association’s financial position each month.

We will dive deeper into the individual accounts like cash and receivables in future blogs in this Series.  A short example of what to look forward to:

  • Cash – Do you know what your bank accounts are used for? Do you verify balances? Are you pursuing returns over security?
  • Receivables – Are you expecting to collect everything that is owed to the association? Did you bill for all services?
  • Payables – How much does the association owe to vendors?
  • Prepaid assessments – Are you shoring up today’s cash balances with money collected for future expenses?
  • Operating Fund (Equity) – Does the association have excess funds, has it been over-spending? End Of Article
By Newman CPA

By Newman CPA

Chapter Happenings Sponsor, May 2021

By: Jeremy Newman CPA. Newman Certified Public Accountant PC.

Visit us online: www.hoacpa.com

Read All Reading Financial Statements Series© Blog Posts:

  • HUB International NW - HOA And Condo Solutions - Web Ad
  • Barker Martin
  • Newman HOA CPA - Banner Ad
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • Rafel Law Group - Banner Ad
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • The Copeland Group - Banner Ad

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  • Columbia Bank - Logo
  • Rafel Law Group PLLC - Logo
  • CIT - Community Association Banking - Logo
  • HUB International NW - Logo
  • Association Reserves WA - Logo
  • Agynbyte - Logo
  • ServPro Of Seattle NW - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo

Chapter Magazine

Journal July-August 2022

Jul/Aug 2022 Issue

Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Association Reserves of Washington - Ad
  • Pacific Western Bank - Small Ad