Reserve funds transfer

Carol,

Are you using cash or accrual basis accounting? What the IRS is concerned with will be based on the accounting method used.

As for funding your Reserves, I believe that money transferred into the Reserve should be done in the year the money is collected for the Reserves.

I deposit funds into the Reserve account over the year, a bit each month until the obligation is met. How much I transfer is based on the amount collected and the amount of expenses for any given month. Financially speaking, since most reserve funds are held in accounts that bear a higher interest rate, it makes sense to meet that obligation as soon as possible (providing you don't allow the operating fund to come up short).

So Carol, is the amount transferred to the Reserves each year based on a Reserve Study or simply what money is left over at the end of the year?

Or is the 50K to 100K due to line items that came in under budget?

From what you are explaining, it appears that you are simply placing any left over funds from the operating fund into the Reserves. This way never really works because individuals don't really see funding the Reserves as an obligation (expense) to the Association.

My advice would be to make an expense item in your budget for funding the Reserves and try to meet it. Then, at the end of the year, for any under budgeted line items, you can transfer those funds to the reserves as well.

Each year, assessments should be raised until you can actually meet the expense of funding the reserves. Ideally, the Board can get the membership to go along with a large increase to fully fund the Reserves. Sell that by saying if the Reserves are properly funded there should be no expectation of a special assessment in the future or putting a little away each month vs. paying a huge amount when needed.

I know it can be difficult to properly fund the Reserves. After our first Reserve Study was done (just 5 years ago) my Association required a 20% increase in assessments to fund the Reserves. Fortunately we were able to obtain the necessary votes to have that increase and our Association is in fairly decent financial shape.

Accounting is not my strong suit and it has been a few years since I studied it in school. My understanding is that under accrual accounting income and expenses for a particular year are normally posted to the books for the year in which the money was in theory either earned or spent.

I take that to mean that if your 2014 fiscal year ends on 12/31 that any expenses from 2014 would still be posted to the 2014 accounts even if the actual payment occurred in 2015. For example, a water bill for December 2014 would be posted to the 2014 accounts even if it was not received and paid until January 2015.

Under accrual accounting method, yes.

From the link I provided earlier:

Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when you receive the goods or services. You don't have to wait until you see the money, or actually pay money out of your checking account, to record a transaction.

Advantages and disadvantages of the accrual method. While the accrual method shows the ebb and flow of business income and debts more accurately, it may leave you in the dark as to what cash reserves are available, which could result in a serious cash flow problem. For instance, your income ledger may show thousands of dollars in sales, while in reality your bank account is empty because your customers haven't paid you yet.

Excellent analyses of this subject...well said!

oljim, in texas

Interesting stuff NpS.

Am wondering if what you described can only be done using only an accrual system of accounting.

In other words, using cash basis accounting - is it appropriate to post items entered in January as actually showing up on the books with a December date?

What do u think?

oljim, in texas

Thank you NpS. Good stuff!

oljim, in texas