Accrual Accounting FL Condominiums

Started by ReinhardB • 8 replies • 637 views

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ReinhardB (Florida)
Posts: 3

Posted:

In Florida Chapter 61B-22.006 under Financial Reporting Requirements defines the Basis of accounting. The financial statements required by Sections 718.111(13) and 718.301(4), Florida Statutes, shall be prepared on the accrual basis using fund accounting in accordance with generally accepted accounting principles.
According to my understanding, the accrual principle is the concept that you should record accounting transactions in the period in which they actually occur, rather than the period in which the cash flows related to them occur. Examples of the proper usage of the accrual principle are:

Record revenue when you invoice the customer, rather than when the customer pays you.
Record an expense when you incur it, rather than when you pay for it.

So far, so good. Now our accountant tells me that he needs to book an obligation for the full amount when a contract has been signed in full and then any payment made will reduce any such obligation. Quite frankly, during my professional life I have never seen that we have added a transaction in our books for a contract value. What we did, of course, was entering an accrual into the books for material delivered or services performed if no invoice had been received.

Maybe my understanding is completely different regarding the requirement of Florida Statutes 718.111(13) and 718.301(4) and Florida Chapter 61B-22.006. Therefore, I hope that someone in the community can help me to better understand that topic of accrual accounting for Florida condominiums.

NpS (Pennsylvania)
Posts: 4,216

Posted:

"Generally Accepted Accounting Principles" (GAAP) are a national standard, not a state-by-state standard. So, shouldn't make any difference if you are in FL or any other state.
Your accountant may be correct if he is saying that a Liability in the full amount is generated when a contract is signed.
Your accountant is not correct if he is saying that the entire cost should be recognized as an Expense when the contract is signed. Let's say that services under the contract are provided evenly every month for the entire year - Then 1/12 of the Expense should be recorded each month.
Your accountant should be able to explain the difference between recording a Liability and recording an Expense. He can both an still comply with GAAP.

Sikubali jukumu. Read all posts at your own risk.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Accounts like Accrual Accounting versus Cash Basis. Cash Basis is the method used but most people for their personal finances such as a checking account. End of my knowledge........LOL

TimB4 (Tennessee)
Posts: 21,062

Posted:

Your accountant is doing accrual accounting.

It's just a method of documenting finances. Everything is received when it is due and everything is owed when the contract is signed. Not the way most households do finances. It is the way most companies do business.

The HOAs/COAs I've seen vary but many simply use cash basis as it's easier for everyone to understand.

The Board can simply tell them to change to cash basis for the following tax year (not good to change within a tax year).

ReinhardB (Florida)
Posts: 3

Posted:

Thank you!

ReinhardB (Florida)
Posts: 3

Posted:

@Tim84: Thank you for responding as well. I did some further research and have found the following:
1)A contract asset is an entity’s right to payment for goods and services already transferred to a customer if that right to payment is conditional on something other than the passage of time. https://www.revenuehub.org/presentation-of-contract-assets-and-contract-liabilities/
2)Merely signing a contract does not by itself require a journal entry. In other words, signing a contract for a future transaction does not mean the company is increasing or decreasing an asset or a liability at the time of the signing. Of course, if cash or some other asset is exchanged at the time of the signing, it will have to be recorded. https://www.accountingcoach.com/blog/entry-when-contract-signed
3)A contract to perform future services for a customer is not reported on the balance sheet of the company that will be providing the services. https://www.accountingcoach.com/blog/customer-contract-balance-sheet

From That perspective it seems that the contract for services not yet performed should not be recorded in the books!
Therefore I still have the same question what am I missing?

JohnC46 (South Carolina)
Posts: 14,265

Posted:

When we hired our MC, we had been operating on a Cash Basis. Our MC told us best for a business to use Accrual and that is what CPA's, accountants, and the government likes. We went Accrual.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By TimB4 on 02/22/2021 1:31 PM
Your accountant is doing accrual accounting.

It's just a method of documenting finances. Everything is received when it is due and everything is owed when the contract is signed. Not the way most households do finances. It is the way most companies do business.

The HOAs/COAs I've seen vary but many simply use cash basis as it's easier for everyone to understand.

The Board can simply tell them to change to cash basis for the following tax year (not good to change within a tax year).

Good explanation. I am told one can switch accounting methods but accountants and the IRS do not like one switching around.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Some state statutes require accrual accounting for HOAs and Condos. Check first.

Sikubali jukumu. Read all posts at your own risk.

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