As an HOA board member, it can be difficult to determine which accounting method is appropriate for your community. If you choose the wrong type, you could be looking at added stress and problems down the road. And since switching accounting types mid-year is not a good solution—you would be left with a headache of skewed statistics and numbers—it’s best to have the information beforehand so you can make the best decision for your HOA.
For those unfamiliar, the two main accounting types are accrual accounting and cash accounting.
If you choose to use the accrual accounting method, expenses and revenue are recorded when they are earned. If a vendor performs a service, you would record the payment as soon the duty has been performed. This method allows you to gauge the profitability of your HOA—irrespective of amount of cash in the bank or on hand—and it’s financial health.
With the cash accounting system, you only record revenue when a payment is received and only record your expenses when you make a payment. Cash accounting is generally not as complex as accrual accounting because you’re recording actual cash flow. Cash-based business and small business often use cash accounting.
Some possible downsides for your HOA accounting using cash accounting include not being able to track accounts payable or accounts receivable, which is why it’s simpler and easier to maintain. You could also miss hidden expenses that the cash accounting system hasn’t yet accounted for. This can be dangerous because it can make it seem like your association has more money that it really does.
Best Accounting Method for HOAs
The accrual accounting method is generally used over the cash accounting method for homeowners associations. Accrual accounting allows a bigger, more accurate picture of your current financial state, which is so beneficial for HOAs when planning for the next year’s budget. The cash accounting method could also make your association look less profitable than it really is, which is deceiving and can effect the views of board members and homeowners. Therefore, over the long term, accrual accounting is generally the best solution for managing and determining the financial state of a homeowners association.