Do you know which accounting system is best for your homeowners association?
It’s an important question that all board members and HOA managers should be considering. Choosing the correct accounting method is an important decision, as it can affect how a business’s financial state is managed. You also don’t want to find yourself choosing the wrong system, then experiences with the pains involved with trying to switch.
There are two primary methods of accounting: accrual accounting and cash accounting. For homeowners associations, the accrual accounting method is preferable to cash accounting.
The Disadvantages of Cash Accounting
While the cash accounting system can be ideal for small or cash-based businesses, there are some real downsides when using it for a homeowners association. The cash accounting method involves only recording expenses when a payment is made and only recording revenue when a payment has been received.
While this makes the process less complex, it also leaves out the option to track beneficial information, such as accounts receivable or accounts payable. Unseen expenses can also be left unaccounted for, which can make it seem like your HOA has more money than it actually does. The cash accounting method can skew the numbers and be more deceiving, which can lead to doubt from residents and other board members.
Benefits of Accrual Accounting
The accrual accounting method involves recording your revenue and expenses at the time they are earned. For example, if you hire a vendor for a property repair, the payment to them would be recorded as soon as the vendor performs the duty—as opposed to when the payment goes through at the first of the month. This helps your board keep track of the HOA’s actual profitability, regardless of cash present on hand or in the bank. You can also maintain a more accurate picture of the your community’s financial health than with cash accounting.
Overall, accrual accounting is more beneficial to HOAs over the cash accounting method. Having a more accurate status of your financial situation will help in planning for things in the future, such as the budget for the next year.