What Is The Best Accounting Method for HOA?
A well-run Homeowners Association (HOA) is central to maintaining an appealing neighborhood and preserving property values. And although running an HOA comes with plenty of responsibilities, none are more critical than proper financial accounting.
The best way to do this is to select the accounting method that’s the right fit for your HOA. HOAs take in and spend money differently, so your accounting method should be tailored to fit your needs. Fortunately, most HOA accounting software can help you master either of the two predominant accounting methods—and customize your accounting process.
Whether your HOA oversees a smaller development or a huge master-planned community, here are some of the most commonly used accounting methods for HOAs and when you might want to consider each one.
What are the methods of accounting?
For HOAs, there are two methods of accounting that most will use: the cash basis method and the accrual basis method. Although there are alternative methods—such as modified cash basis and hybrid methods—these two main accounting methods are the most commonly used.
Accrual accounting records income and expenses when they are incurred, regardless of when the money actually changes hands. This means you can take advantage of tax deductions when bills are due, even if they have not yet been paid.
The accrual method also enables you to report on income earned but not yet received, so your HOA can make more informed decisions about budgeting and future expenses. This method is recommended for larger HOAs with more complex financial needs.
How does accrual accounting work for HOAs?
If an HOA is contracted to receive a fee in June and actually receives payment in July, accrual accounting would record this income in June, when it was earned. Similarly, if an expense was incurred in June but paid in July, the expense would be recorded in June.
Pros of accrual accounting for HOAs:
- Provides a comprehensive view of the HOA’s financial health by showing all income and expenses within the period they were earned or incurred.
- Allows for accurate financial forecasting and budgeting because it reflects income and expenses in real time.
- Preferred by auditors and conforms to the Generally Accepted Accounting Principles (GAAP).
Cons of accrual accounting for HOAs:
- Accrual accounting may complicate cash flow tracking because income is recorded before it is actually received and expenses are recorded before they are paid.
- Requires more time and expertise to manage because of its complexity, possibly necessitating a professional accountant or management company.
Although accrual accounting is the preferred method of tracking financials for HOAs, cash-basis accounting is an option that may work better for smaller associations or those with simpler needs.
For instance, cash-basis accounting may be the most practical option if your HOA only has a few members and doesn’t have complicated financial transactions.
How does cash accounting work for HOAs?
With cash-basis accounting, income is reported only when it is actually received and expenses are reported when they are paid. All other transactions—such as contracts or purchases—are not reported until the money is exchanged, as opposed to when it is earned or incurred.
Using the previous example, the HOA fee contracted in June would be recorded only when it’s actually paid in July. Likewise, the expense incurred in June would be recorded only when paid in July.
Pros of cash accounting for HOAs:
- Simpler and easier to manage because it only involves tracking actual cash flow.
- Gives an accurate and immediate picture of the amount of cash available to the HOA at any given time.
Cons of cash accounting for HOAs:
- It may not give a complete picture of the HOA’s financial health because it doesn’t account for money owed to the HOA or bills that have yet to be paid.
- Makes financial planning more challenging because it doesn’t reflect income or expenses until the cash changes hands.
- Doesn’t conform to the GAAP, which could be a problem if the HOA is subject to an audit.
Which method of accounting is the best method to use?
So, which accounting method is best for your HOA? The answer will depend on the size and complexity of your HOA as well as its particular needs.
Generally speaking, if you have a larger HOA with complicated financial transactions, accrual-basis accounting is probably more appropriate.
However, if your HOA is small or has simpler needs, cash-basis accounting may be the most practical option—so long as you understand that it may not provide a full picture of the HOA’s financial situation.
In any case, HOAs should work with an experienced accountant to determine the best accounting method for their particular needs. This will help ensure that they keep accurate and up-to-date records, and will assist in better decision-making when it comes to managing the HOA’s finances.
Which accounting method is easiest for HOAs?
Many HOA boards wish to identify the simplest accounting method for their association.
Although cash-basis accounting is simpler to understand and manage, it may not provide a complete picture of the HOA’s financial standing or accurately reflect transactions that have occurred but haven’t yet been paid.
Accrual-basis accounting offers more in-depth information but requires more time and effort to track and manage. This makes it a more complex and time-consuming process overall, but one that often yields more detailed financial information than cash-basis accounting.
Enhance your accounting with HOA Software
Choosing the right accounting method for your HOA involves a fair bit of consideration, research, and decision-making. Fortunately, HOA software can help simplify the accounting process, regardless of which method you choose.
HOA website software can track financials in real time and automate many other administrative tasks for HOAs, such as billing and collections, maintenance requests, online payments, and more. This helps HOAs save time and money while it increases their efficiency and accuracy.
By using HOA software to manage their finances, HOAs can ensure that they track their financials accurately regardless of which accounting method they choose. This provides the board with comprehensive information about the association’s finances, enabling them to make confident, informed decisions about how best to manage their budget.
With the right solution at your fingertips, you can easily and accurately manage your HOA’s finances!