The Complete Guide to HOA Financial Management

how to read hoa financial statements

Every significant deviation between actual income and expenses and budgeted income and expenses should be understood. The categories and format of the Balance Sheet are based on what are called Generally Accepted Accounting Principles (GAAP). These principles are the rules established so that every business prepares their financial statements the same way. Accrual Accounting is expensive because in many cases, the bookkeepers need to make entries based upon projected expenses, and then come back later and adjust them. The exact amount of the billing is generally unknown until the invoice from the utility company actually arrives. Then, when they actually receive the March/April bill, they need to go back and make adjusting HOA accounting entries so that the actual March expenses are shown on the Financial Statements.

The Importance of Proper HOA Accounting

That bank statement also becomes a part of the Financial Statements provided to the board of directors for review. The Budget Comparison Report is one of the most useful of all of the statements and schedules contained in the financial statement. A properly prepared Budget Comparison Report lists in one column hoa accounting the actual income and expenses for the period, and in the next column, the budgeted income and expenses for the period. In the last two columns, it will list the budgeted income and expenses for the period as a number and as a percent, and the difference between actual income and expenses for the period.

Where Should the HOA Accounting Reports Go?

  • It’s also not recommended to restrict their access to amenities or shut off their utilities during a trying period in their life.
  • To make a great plan, it is important to have all the information possible.
  • AMS software uses database information to create reports, assess fees, and track violations.
  • These tools increase transparency among board members, residents, and the management company through timely, accurate, and frequent HOA accounting reports.
  • As a title professional, when reading the HOA Income Statement, focus on understanding the sources of income and the expenses incurred by the HOA.

The income statement also reflects any surplus or deficit from operations and may outline reserves for major repairs or capital improvements. “You’ve got some people who want to see more detail and others who want a high-level summary,” says van Rooyen. “On a monthly basis, you don’t want to put in so much information that it becomes very time consuming.” The Board will gain important insight and will maintain compliance with state regulations and association bylaws. Typically it is required by the HOA bylaws, but it also can be required at the state level. The HOA board may also request n adult as a result of unusual situations like Board or management turnover.

Common Financial Ratios for HOAs

Through the assets (money in the checking accounts), liabilities (amounts owed, AP) and equity (capital reserve funds) you will be able to see a clear picture of the bank account status. The Cash Flow Statement is a snapshot of the association’s liquidity and solvency. Within the community, the cash flow statement is a gauge of the association’s ability to fulfill upcoming obligations, like the salary of employees. The cash flow recorded should be the same as the increase or decrease of cash transactions in the Income Statement for accurate reporting. The Balance Sheet is a financial statement that shows the financial situation of the association, basically showing its net worth. This report takes into account the assets, liabilities, and equities to show the overall financial health of your HOA.

how to read hoa financial statements

Identifying fraud or embezzlement is only a byproduct of an audit and is not a direct goal. If an HOA board believes that there is high likelihood that fraud exists, they could engage a fraud audit or agreed upon procedures. In a financial statement review, the CPA will perform mostly analytical procedures and inquiries to support the CPA opinion.

how to read hoa financial statements

This underlines that financial management is a critical component of running a successful community association. To ensure prosperity, associations must budget wisely, collect fees diligently, and save strategically for long-term maintenance and repairs. When reading an income statement, look for inflated expenses to spot fraudulent activities. Check and understand the HOA’s sources of revenue, such as dues, special assessments, and capital contribution fees.

  • The Comparative Income and Expense Report is crucial for evaluating the financial performance against budgeted expectations, highlighting areas of fiscal health or concern within the community.
  • Some community associations even opt to put their financial information on their website to allow homeowners to view it at any time.
  • The income statement is a detailed view of the association’s income compared against its expenses.
  • The homeowner could endure damage to his or her credit report and a lien against the property.
  • The Income Statement is a formal financial statement that summarizes the association’s operations (revenues and expenses) for a specific period of time usually a month or year.
  • This includes reviewing existing policies, obtaining quotes for coverage, and recommending insurance requirements to homeowners.
  • A homeowners association functions in very much the same way as any business organization.
  • Both balances may need adjustment in order to report the true amount of cash.
  • Assess whether the disbursements align with the community’s needs and budgetary allocations.

Maintain healthy HOA vendor relationships to keep your management company and the communities you serve at the top of their client list. The collections process is generally not beneficial for either the homeowner or the HOA. The homeowner could endure damage to his or her credit report and a lien against the property. The association often gets less money than is owed and loses the trust and goodwill of the resident.

STEP 3: Provide Results to HOA Members

It involves examining and reviewing the financial statements and discussing internal controls with the management company. In some cases, members of the community might take legal action against your board for mismanagement. And, although state laws and your governing documents might offer you some protection, court rulings may still find you personally liable for poor HOA accounting and financial management. Most states have laws requiring non-profit organizations like community associations to keep comprehensive financial records and report them regularly to their Secretary of State or equivalent state department. If an HOA does not comply with state and local regulations by submitting accounting reports, it could have its “good standing” certificate revoked.

how to read hoa financial statements

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