Reading Financial Statements Series© – BASIS OF ACCOUNTING – KNOW YOUR REPORTS

Reading Financial Statements Series© – BASIS OF ACCOUNTING – KNOW YOUR REPORTS

[ Blog/News ]

Reading Financial Statements Series© – BASIS OF ACCOUNTING – KNOW YOUR REPORTS

We introduced you to association balance sheet fund accounting for assessments & expenses as part of a balance sheet in our last blog, which was the sixth in our Reading Financial Statements Series©. In this blog we will explore the basis of accounting and how your financials can be presented in more detail. 

Question:

If three different accountants/bookkeepers sat down with the same data & transactions to process, would they prepare financial statements that look exactly the same?

Answer:

Possibly but probably not.

Reason:

Assuming each accountant is accurate and consistent, each may not account for transactions or activity in the same way. They may also set up their reports differently.

Assessment Billing & Receipts Example:

Assume assessments of $100 per homeowner are billed to 50 homeowners on the first of November. Forty owners pay in full on the first of the month, ten owners don’t pay until after the end of the month. How does basis of accounting represent the results of the transactions?

Cash Basis:

Records only cash received. Assessment revenue recorded and presented in the income statement totals $4,000 (40 owners X $100). A receivable is not presented on a cash basis balance sheet.

Accrual Basis:

Records activity regardless of cash collection status. Assessment revenue recorded and presented in the income statement totals $5,000 (50 owners X $100).  A receivable of $1,000 (10 owners X $100) is recorded on the balance sheet.

Expense Example:

Assume landscape invoices for November totaling $2,000 are received from the vendor and paid in early December. What is the difference between cash and accrual accounting for November’s landscape expense?

Cash Basis

Using the cash basis, the accountant will record the $2,000 landscape expense in the month the check is cut and sent to the vendor.  The expense will be recorded in December instead of November.

Accrual Basis

Under the accrual basis, the bookkeeper will account for the $2,000 November landscape invoice in November by accruing the expense in accounts payable.

November Income Statement Comparison Using Both Examples:

Cash BasisAccrual Basis
Assessment Revenue:$4,000$5,000
Landscape Expense:$ $(2,000)
Excess Income:$4,000$3,000

You can clearly see the different results presented under the cash and accrual bases of accounting.
Know how your financials are presented so you can continue to make great decisions.

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, November 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
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • The Copeland Group - Banner Ad
  • Rafel Law Group - Banner Ad
  • 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
  • Barker Martin

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • CAU - Community Association Underwriters - Logo
  • Agynbyte - Logo
  • Rafel Law Group PLLC - Logo
  • Association Reserves WA - Logo
  • Transblue - Logo
  • RW Anderson Services - Logo
  • SageWater - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • HUB International NW - Logo
  • ServPro Of Seattle NW - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • CIT - Community Association Banking - Logo
  • Columbia Bank - 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
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.

Visit us online: www.hoacpa.com

Read All Reading Financial Statements Series© Blog Posts:

  • 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
  • HUB International NW - HOA And Condo Solutions - Web Ad
  • The Copeland Group - Banner Ad
  • Newman HOA CPA - Banner Ad
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • Barker Martin

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Columbia Bank - Logo
  • Transblue - Logo
  • SageWater - Logo
  • RW Anderson Services - Logo
  • Agynbyte - Logo
  • CAU - Community Association Underwriters - Logo
  • ServPro Of Seattle NW - Logo
  • HUB International NW - Logo
  • Association Reserves WA - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • Rafel Law Group PLLC - Logo
  • CIT - Community Association Banking - 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
Reading Financial Statements Series© – Balance Sheet Part 5: PREPAID EXPENSES

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

[ Blog/News ]

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

Read All Reading Financial Statements Series© Blog Posts:

  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • HUB International NW - HOA And Condo Solutions - Web Ad
  • Barker Martin
  • Newman HOA CPA - Banner Ad
  • Rafel Law Group - Banner Ad
  • 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

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Newman HOA CPA - Audit & Tax - Logo
  • Transblue - Logo
  • Agynbyte - Logo
  • HUB International NW - Logo
  • RW Anderson Services - Logo
  • SageWater - Logo
  • Columbia Bank - Logo
  • Rafel Law Group PLLC - Logo
  • CIT - Community Association Banking - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • Association Reserves WA - Logo
  • ServPro Of Seattle NW - Logo
  • CAU - Community Association Underwriters - 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

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:

  • The Copeland Group - Banner Ad
  • Barker Martin
  • Rafel Law Group - Banner Ad
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • 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
  • Newman HOA CPA - Banner Ad

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Agynbyte - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • CAU - Community Association Underwriters - Logo
  • Transblue - Logo
  • Association Reserves WA - Logo
  • Rafel Law Group PLLC - Logo
  • CIT - Community Association Banking - Logo
  • Columbia Bank - Logo
  • HUB International NW - Logo
  • ServPro Of Seattle NW - Logo
  • RW Anderson Services - Logo
  • SageWater - Logo
  • Newman HOA CPA - Audit & Tax - 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

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

Read All Reading Financial Statements Series© Blog Posts:

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

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • RW Anderson Services - Logo
  • Rafel Law Group PLLC - Logo
  • SageWater - Logo
  • Agynbyte - Logo
  • ServPro Of Seattle NW - Logo
  • CIT - Community Association Banking - Logo
  • Association Reserves WA - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • Transblue - Logo
  • CAU - Community Association Underwriters - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • Columbia Bank - Logo
  • HUB International NW - 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

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

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

Read All Reading Financial Statements Series© Blog Posts:

  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • Barker Martin
  • The Copeland Group - Banner Ad
  • 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
  • HUB International NW - HOA And Condo Solutions - Web Ad

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Association Reserves WA - Logo
  • CAU - Community Association Underwriters - Logo
  • RW Anderson Services - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • ServPro Of Seattle NW - Logo
  • SageWater - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • Rafel Law Group PLLC - Logo
  • HUB International NW - Logo
  • Transblue - Logo
  • Columbia Bank - Logo
  • Agynbyte - Logo
  • CIT - Community Association Banking - 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
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:

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

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Association Reserves WA - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • RW Anderson Services - Logo
  • Rafel Law Group PLLC - Logo
  • HUB International NW - Logo
  • ServPro Of Seattle NW - Logo
  • CAU - Community Association Underwriters - Logo
  • Agynbyte - Logo
  • CIT - Community Association Banking - Logo
  • Transblue - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • SageWater - Logo
  • Columbia Bank - 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

Tying Up Loose Ends: End of the Year Checklist for Self-Managed Communities

[ Blog/News ]

Tying Up Loose Ends: End of the Year Checklist for Self-Managed Communities

As we near the end of the year, it’s time to take care of loose ends and prepare for the upcoming year. This can often prove a difficult balancing act, especially without the help of professional management. However, just because you’re a self-managed community doesn’t mean you must do without professional assistance. In fact, under the Washington Nonprofit Corporation Act, a board of directors is allowed to do just that: rely on information, opinions, reports, and statements from professionals in a given field. What follows is a basic primer on what you, as a self-managed community, need to do at year-end.

Balancing the Books — Financial Statement, Budget, Audit & Tax Return

Whether you’re a homeowners association or a condominium owners association, year-end means it’s time to balance the books and take stock financially.

Annual Financials & Budgeting

Both the Condominium Act and the HOA Act require every association to prepare, at least annually, a “financial statement.”  A financial statement consists of a balance sheet and an income-and-expense statement.  The Condominium Act provides that the statement must be prepared in accordance with generally accepted accounting principles (GAAP).  This means that all figures have to be shown on an accrual basis, which records income when earned and expenses when incurred, as opposed to a cash-basis model, where income and expenses are recorded when cash actually flows in and out.  The HOA Act does not mandate compliance with GAAP, but doing so constitutes best practices.

In addition to the financial statement, associations should prepare an annual budget that projects anticipated operating costs and reserve contributions for the coming year.  This is required by the bylaws of most associations, although it is not a statutory requirement.  However, before a new schedule of assessments may be used, there must be a budget that supports the assessment amounts.  If a budget proposed by the board of directors is not ratified by the association, the last budget that was ratified must remain in effect.

What’s an audit, and can I waive it?

Audits, which are conducted by certified public accountants (CPAs), verify the accuracy and fairness of an association’s financial activity and reports.  Condominiums with 50 or more units are required to have their financial statements audited annually by a CPA.  Condominiums with fewer than 50 units can waive the annual audit if 60% of the units (not including units owned by the declarant) vote to waive.  Homeowner associations with annual assessments of $50,000 or more are required to have an annual audit, unless waived by a 67% vote at a meeting at which a quorum is present.  Waiver must be done one year at a time: multi-year waivers are not allowed under the statute.

Taxes, Taxes, Taxes

An association must file a federal tax return each year, even though it is a nonprofit corporation or association.  The return is due March 15, unless an extension is requested.  One of two IRS forms is used.  Form 1120 is considered the “Corporate Method,” and graduated tax rates begin at 15%.  Form 1120H is the “Exempt Method” and uses a flat tax rate of 30%.  If the association has no taxable income, the tax rate may be irrelevant.  Form 1120 can save you money if there is taxable income to report, but it is more complex to fill out and requires advance planning.  Form 1120H is easier to complete but the following four criteria must be satisfied: (1) 85% of the units must be for residential use; (2) at least 60% of gross income must be tax exempt income; (3) 90% of expenses must be to acquire, build, manage, maintain, and care for property; and (4) residual income must not be used for members’ benefit.

Given the complexities of tax laws, consult with a tax professional to ensure compliance with federal requirements and the most favorable tax treatment for your association.

Preserving Your Investment – Reserve Study and Maintenance Plan

Next on the list are those items which keep your buildings and improvements in good repair over the long term: reserve studies and inspections.

Confused about Reserve Studies?

Under a law passed in 2008, all Washington condominium associations (including old-Act condos) must conduct a reserve study and update it annually.  Non-condo homeowner associations are not subject to this requirement.  A full reserve study includes a physical assessment of all building components and improvements that are expected to require replacement, and a financial analysis.

The purpose of annual updates is to ensure that reserve funding is on track and, if not, to adjust the funding schedule. This means comparing actual wear of components to anticipated wear, adjusting estimates of remaining service life as needed, and checking actual funding and investment returns against expected revenues and investment returns. The update must include an onsite inspection every third year; interim-year updates do not require onsite inspections.  Annual updates are not required for associations with ten or fewer units.

Inspect and Repair Every Year

Annual inspections and regular maintenance and repair are key to the long-term well being of any association.  The reserve study may include physical inspection of buildings and improvements, but inspection is not the same as maintenance.  As board members, it is your responsibility to make sure that regular maintenance and repairs are carried out to preserve the condition of the buildings and improvements.  Since board members change year, having a maintenance plan that specifies the schedule for maintenance of each component helps provide continuity as members rotate off the board – particularly in self-managed associations.  Most reserve study analysts can also prepare maintenance plans.

Legal Housekeeping – License Renewal

The reserve study and annual inspections help preserve the physical well-being of your buildings, but ensuring the legal life of your association is important as well.  Nonprofit corporations must register annually with the Secretary of State.  An Annual Report must be filed with the Secretary of State.  This can be done online and includes verifying the names and addresses of all officers and directors, the principal place of business, your corporation activities, a signature from an authorized board member, and paying a fee. (See http://www.sos.wa.gov/corps/).  Failure to renew your registration will trigger an administrative dissolution of the corporation.  The corporate license can be reinstated for three years after dissolution, but there is an extra fee for reinstatement.  A corporation must be in good standing with the Secretary of State to maintain any court action – such as a collection action – so annual renewal is important.

Fostering a Sense of Community – the Annual Meeting

The above items are needed to keep your association in good order, but remember what creates a sense of community: the people.  While the law (and probably your bylaws) requires every condominium and homeowner association to have an annual meeting, the annual meeting is also a great opportunity to strengthen your community.  Adding a social element to the meeting, by having food and beverages, brings people in and creates a positive atmosphere for participation.  If alcoholic beverages are involved, it is prudent to complete the annual meeting business before opening the bar!  Putting photos from the annual meeting on the association website reinforces the sense of community and fun.

Conclusion

Managing your own association can be a daunting task.  Knowing the things you have to do at year-end to satisfy legal requirements is critical.  By getting started early in the fall on financial matters, annual inspections and reserve study updates, and license renewal, you will keep your association on track and be ready for a productive and fun annual meeting.

By Tony Rafel

Managing Partner, Rafel Law Group PLLC

Tony Rafel is the Managing Partner of Rafel Law Group PLLC, a law firm that represents community associations
  • The Copeland Group - Banner Ad
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • Barker Martin
  • HUB International NW - HOA And Condo Solutions - Web Ad
  • 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

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Rafel Law Group PLLC - Logo
  • Columbia Bank - Logo
  • CIT - Community Association Banking - Logo
  • HUB International NW - Logo
  • ServPro Of Seattle NW - Logo
  • Association Reserves WA - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • CAU - Community Association Underwriters - Logo
  • SageWater - Logo
  • Agynbyte - Logo
  • Transblue - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • RW Anderson Services - 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