Homeowners Associations are responsible for more than just community and website upkeep – they often become responsible for managing and tracking their members’ finances. And when an HOA fails to properly manage and track its finances, it can lead to serious consequences.

Luckily, HOAs use different accounting methods to ensure fees are paid correctly and on time. The three most common HOA accounting methods most organizations use are cash basis accounting, accrual basis accounting, and hybrid methods.

In this short guide to HOA accounting, we’ll discuss the basics of each type of method and provide tips on how HOA members can ensure their fees are paid correctly and on time.

 

 

What Accounting Methods Do HOAs Use?

HOAs are often run by rotating boards of volunteers who must quickly learn the ins and outs of the processes when they join. And if an HOA doesn’t have a firm grasp on the specific accounting methods they should use, it can lead to serious consequences.

Here are the three most common HOA accounting methods used:

Cash Basis Accounting

Cash basis accounting, or cash flow accounting, is the simplest of the HOA’s accounting methods. In this system, income and expenses are only accounted for when they’re paid or received in cash. This method allows HOAs to keep track of their income and expenses daily and makes it easier to manage cash flow.

For instance, if an HOA member pays their dues in January but the payment isn’t received until March, the income would be recorded in March when it is received. This method also makes it easier for HOAs to manage their budgets as they don’t have to worry about setting aside funds for future expenses.

Pros:

• Easier to track cash flow
• Makes budgeting easier

Cons:

• Doesn’t account for transactions that don’t involve cash
• May lead to discrepancies between income and expenses

Accrual Basis Accounting

Accrual basis accounting, also known as the accrual method of accounting, is the more complex method used by HOAs.

In this system, income and expenses are immediately recorded the moment they are incurred instead of when payment is received or made. This means that the HOA can record all transactions as they occur to get an accurate picture of their finances.

For example, if an HOA member pays their dues in January but the payment isn’t received until March, the income would be recorded in January when it was due. The accrual method also allows HOAs to track and manage long-term projects or investments more efficiently by providing a comprehensive view of their finances.

Pros:

• Accurately records transactions
• Easier to track long-term projects and investments

Cons:

• More complicated accounting process
• Difficult to manage cash flow

Hybrid Accounting Method

The hybrid accounting method combines the benefits of both cash-basis and accrual-basis accounting. This method allows HOAs to record transactions when they occur or when payment is received.

This way, HOAs can have a more comprehensive view of their finances without sacrificing the ability to easily manage their cash flow.

A common example of a hybrid accounting method is when an HOA sends out dues statements in January for payments due by the end of the month. The income would be recorded in January as it was incurred, but if the payment isn’t received until March, it will still be recorded in March when it was received.

Pros:

• Combines the benefits of cash-basis and accrual-basis accounting
• Accurately records transactions
• Easier to track long-term projects and investments

Cons:

• A more complex system that may be difficult for HOAs to manage

Common Questions About HOA Accounting Methods

What is the best accounting method for HOAs?

The best accounting method for HOAs depends on the HOA’s size, budget, and other factors. Generally speaking, most HOAs use a combination of cash-basis and accrual-basis accounting to get an accurate picture of their finances while still maintaining control over their cash flow.

However, if an HOA deals with complex transactions or long-term projects, they may need to use a hybrid accounting method to get the most comprehensive view of their finances.

What are the accounting categories for HOA?

The most common accounting categories for HOAs include dues, assessments, maintenance fees, repairs and improvements, legal expenses, and administrative costs.

Depending on the HOA’s size and budget, additional categories may be included as well. However, avoid overcomplicating the accounting system, which may lead to discrepancies and confusion.

Can an HOA use QuickBooks for accounting?

Yes, many HOAs use QuickBooks to manage their finances. The software is easy to use and offers a wide range of customizable options, making it ideal for both bookkeeping for small HOA accounting and larger communities. If your HOA is looking for a robust accounting system, QuickBooks may be the right choice.

The Bottom Line

Choosing which HOA accounting method to use is an important decision that can significantly impact your HOA’s success. If done correctly, accounting methods can help HOAs keep track of their finances and ensure all fees are collected in a timely manner.

By understanding the different types of accounting used by HOAs and how they work, HOA members can be sure that their dues are paid on time and accurately, helping them run a successful HOA. Do your research and speak to a qualified accountant if necessary to ensure you’re using the best accounting method for your HOA.