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. 

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.

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.