Accounting Question

Started by DonaldN • 20 replies • 2701 views

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DonaldN (Connecticut)
Posts: 183

Posted:

our bookkeeper gave me a description (attached) of the way they handle the accounting for the association's annual insurance policy - i wanted to take this verbal description and develop a spreadsheet (attached) to illustrate the accounting entries involved over one fiscal year - the spreadsheet is the result of a back and forth between the bookkeeper and myself - the problem with the spreadsheet is that the basic accounting equation doesn't hold , i.e. assets = liabilities + owner's equity - pointed this out to the bookkeeper and she had no answer.

i'm hoping someone with an accounting background will respond and shed some light.

what i've learned from this is that you can teach someone how to use accounting software but that doesn't mean they understand accounting first principles - i've never taken an accounting course myself and constructed the original spreadsheet from the verbal description and some logic.

there have been other posts recently about getting accounting software - i would advise those who get the software without an accounting background to also learn the accounting rules - they will then be better prepared to tackle the not so "canned" situations.

ps - this is the first time i've attached things and so i'm hoping they are accessible.

📎 Attachments (2):

⏸ Downloads temporarily unavailable

📊1413461056071.xls(23 KB)

📝1413461060754.doc(22 KB)

SusanW1 (Michigan)
Posts: 5,202

Posted:

Can you tell us WHY you feel that you need to create a spreadsheet on this subject matter?

Most HOa members and even a few board members can't read their own financial statements i. e. Balance Sheet, P/L and y-t-d budgeted vs. actual, so why the spreadsheet on such a obscure subject?

TimB4 (Tennessee)
Posts: 21,059

Posted:

Donald,

Is your Association currently set up using Accrual basis vs. a cash basis?

Most people understand cash basis accounting as this is basically what people use for their personal finances. If you take the Association to an Accrual basis you will probably need to have volunteers who have some accounting background to serve as treasurer - this could cut down the available pool of volunteers.

Tim

DonaldN (Connecticut)
Posts: 183

Posted:

good question Susan - i have a math background and an interest in the accounting behind the financials - i'm also a Board member - our Treasurer is unfortunately not willing to share his insights - if you read the verbal description that i attached to the prior post, you would see that it left a lot to be desired if someone without an accounting background wanted to understand the accounting involved.

and so i decided to create the spreadsheet to supplement the verbal description and hopefully make the accounting more understandable.

i also believe it's good business if Board members educate themselves with respect to the accounting involved in the association's financials - my opinion.

MoM1 (Massachusetts)
Posts: 56

Posted:

I am an accountant with over 25 years experience. While these entries are technically correct for corporate accounting, for a HOA they are way over the top. I have served on my association board and other boards for years and I usually find that I am the only one who really knows accounting. I think that for ease of understanding by the board and the owners who are also looking at the financial statements, using the cash method of accounting makes for fewer problems and confusion. The expense is booked when the bill is paid.

RogerB (Colorado)
Posts: 5,067

Posted:

Donald, you failed to advise on the accounting software which is being used by the bookkeeper. If the bookkeeper is using software more than a spreadsheet hopefully that software provides for inputing the budget by month. It could provide an Income Statement which includes actual and budgeted amounts for the month and YTD. That would provide the info you want in an organized concise understandable manner to all if cash basis accounting is used.

I would not use the procedure you depicted. If the bookkeeper does not have adequate software to provide the information desired by the Board it is time for them to update accounting software and/or bookkeeper.

RogerB (Colorado)
Posts: 5,067

Posted:

Attached are an HOA's 2011 budget by month and their Income Statement for March 2011. You may notice there are a few significant deviations between actual and budgeted amounts. Due to the age and condition of this townhome association undeterminable expenses occur every year. Therefore, optional expense items are adjusted as necessary during the year. The key budget is not their annual budget; it is their long range (26 years) reserve budget which provides the perspective for how much needs to be added to and is anticipated to be spent from the reserve fund yearly.

Donald, with regard to your insurance example note the following real example:
This HOA had a fire affecting two units after the budget was approved. This resulted in an expense of the $5,000 deductable PLUS the insurance company chose not to renew. As a result of this claim a new insurance company with different coverages was required at an increased cost. I provide this example to help put your post on insurance into perspective?

📎 Attachments (2):

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📄141313365771.pdf(7 KB)

📊141313368954.xls(37 KB)

DonaldN (Connecticut)
Posts: 183

Posted:

I just wanted to see if someone with an accounting background could check out my spreadsheet and offer a reason as to why the accounting equation doesn't hold.

our management company uses accrual accounting and they prepare a complete set of monthly financials - Income Statement, Balance Sheet, comparison of budget to actual, etc., etc. - their accounting software is fine.

Roger thanks for the information and i'm sorry you've had some bad luck but i don't know what you mean by " putting my post on insurance into perspective " ??

GinaJ1 (Florida)
Posts: 14

Posted:

I'm not necessarily agreeing with how this is done. I've done HOA accounting in the past from the accountant's point of view. What needed to happen was:

1. Monthly, I book the expense of insurance to debit my expense and credit my prepaid insurance.
2. When I write the check for the insurance, I would debit my prepaid insurance and credit the checking account.

This is assuming that they want to show the expense monthly.

DonaldN (Connecticut)
Posts: 183

Posted:

in your step 2 , our bookkeeper debits insurance payable on the liability side and credits the checking account - i've attached my spreadsheet again - what's troublesome is that the accounting equation doesn't seem to work and i can't figure out why ?

📎 Attachments (1):

⏸ Downloads temporarily unavailable

📎1413311123071.xls(23 KB)

DonaldN (Connecticut)
Posts: 183

Posted:

Gina , could you take my spreadsheet and set it up the way you think it should be done and attach it to your reply ?

MoM1 (Massachusetts)
Posts: 56

Posted:

Donald--It appears that your total insurance for one year is $1200 which breaks down to an expense of $100 per month. However when it comes down to actually writing the check you are paying $150 a month. Many insurance companies only allow for 8 monthly payments. That is why there is the extra set of journal entries. If your insurance policy and payments begin and end within one fiscal year it really is easier to just expense directly as the premiums are paid.

DonaldN (Connecticut)
Posts: 183

Posted:

MoM1 , could you take my spreasheet and edit it so that it is correct and then attach it to your response - and also have it so that the accounting equation holds - thanks

📎 Attachments (1):

⏸ Downloads temporarily unavailable

📊14147558571.xls(23 KB)

MoM1 (Massachusetts)
Posts: 56

Posted:

Donald--What is missing is the revenue portion of your condo fees being booked on the income statement, also on the balance sheet the number in the cash account should reflect the ending balance, not the amount disbursed. Obviously your association has money in the bank.

Assets: Money in Bank
Prepaid Insurance

Liabiltites: Insurance Payable

Equity: Retained Earnings
Net Income/(Loss) from current year

DonaldN (Connecticut)
Posts: 183

Posted:

MoM1 - the spreadsheet i attached was not intended to be a snapshot of our association's current balance sheet and income statement - you don't seem to understand that - it's a made up example for the sole purpose of illustrating the accounting entries for an insurance policy.

i've come to this forum because our bookkeeper can't explain or offer an edit to the spreadsheet so that the accounting equation holds true.

if you know the answer then i've suggested that you edit my spreadsheet and attach it to a post to this forum - for the final time i'm attaching the word doc and the spreadsheet.

on the other hand if you don't have a facility with Excel or are unfamiliar with the accounting equation, then let's stop this unproductive back and forth - i'll move on to something else.

and thanks to all who took the time to respond .

📎 Attachments (2):

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📝1414572155671.doc(22 KB)

📊1414572163454.xls(23 KB)

RogerB (Colorado)
Posts: 5,067

Posted:

DonaldN stated:
"what i've learned from this is that you can teach someone how to use accounting software but that doesn't mean they understand accounting first principles - i've never taken an accounting course myself and constructed the original spreadsheet from the verbal description and some logic."

This is a profound statement. I would add that very few Board members understand accural accounting reports; whereas, all who have balanced a check book can understand cash accounting.

In your original attachments, when using accural accounting, the income statement is correct when expensing prepaid insurance of $1200 over 12 months at $100 per month. However, there are several errors on the Balance Sheet.
1) Under assets I would have only one item - Prepaid Assets. There is $1200 on January 1st and the amount decreases $100 each month until the amount is $0 at the end of December.
2) Under Liabilities and Capital I would have two items - 1)Equity and 2)Net Income. Both would begin the year at $1200 and decrease $100 each month until the amount is $0 at the end of December.

Or you could chose to write off the $1200 in prepaid insurance at $150 each month. At the end of January the amount would be $1050 and the amount would continue to decrease by $150 each month until it is $0 at the end of August.

I think you may be mixing accural and cash basis accounting. If your accountant is using accural accounting it suggests to me that they did not create the document you attached. If you wish to understand your HOA's financial reports I strongly recommend changing to cash basis. Otherwise get your accountant to explain the key advantages of accural accounting and how the Board members can try to understand the financial reports

RogerB (Colorado)
Posts: 5,067

Posted:

I goofed stating: "1)Equity and 2)Net Income. Both would begin the year at $1200 and decrease $100 each month until the amount is $0 at the end of December."

Should have posted: Equity = $1200 at the beginning of the year and Net Income = $0. The Net Income = -$100 every month and the Equity decreases by the amount of Net Income each month. For example, at the January Equity = $1100, February Equity = $1000, etc. The Assets and Liabilities both = $0 at the end of December.

RogerB (Colorado)
Posts: 5,067

Posted:

Qualification to my last post: "The Net Income = -$100 every month"

That is correct for the Income Statement but not for the Balance Sheet where Net Income in January = -$100, February = -$200, March = -$300, etc.

DonaldN (Connecticut)
Posts: 183

Posted:

thanks Roger but it would be very helpful if you could edit my spreadsheet as you have described and send it back as an attachment .

RogerB (Colorado)
Posts: 5,067

Posted:

Donald, it is attached. Where do I send my bill?

📎 Attachments (1):

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📊1414582916771.xls(30 KB)

DonaldN (Connecticut)
Posts: 183

Posted:

thanks Roger - we're using the barter system - hopefully i'll be able to help someone with a question .

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