acrual accounting

Started by JC3 • 4 replies • 1815 views

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JC3
Posts: 290

Posted:

What is it?
how many of your associations use it?
is it more helpful than the standard bookkeeping?
is it easier to have money (and items) get lost or stolen?
is it replacing the standard way of bookkeeping?

Is it a good thing?

RogerB (Colorado)
Posts: 5,067

Posted:

JC3, there are two basic types of accounting - Accrual (or some modification thereof) and Cash.
1)Cash accounting is what you use with your checking account. Income and expenses are booked when funds are received payments are made. One does not have to be an accountant to understand HOA financial statements when cash accounting is used.

2)Accrual accounting (or modified accrual accounting) is usually used by larger businesses. I am not an accountant but do know it can get complicated. For example, income is booked when due whether or not it has been received.

To answer your other questions:

how many of your associations use it?
We do not use it for HOAs we manage, but some management companies do.

is it more helpful than the standard bookkeeping?
Not helpful for HOAs IMO; but it is the common accounting method used today by large companies.

is it easier to have money (and items) get lost or stolen? Not necessarily, but it is more difficult to monitor HOA bookkeeping procedures IMO.

is it replacing the standard way of bookkeeping? It has been a standard used for a long long time.

Is it a good thing? Not good or bad. But for HOAs I definitely prefer not to use accural based accounting.

NancyD1 (Florida)
Posts: 447

Posted:

JC3,

Check with your CPA. Most CPA's prefer the accrual method of accounting. The cash method typically distorts the bottom line of businesses. It incorrectly reflects income that should not be there. Accrual gives you the true picture on your bottom line.

The cash method reflects income when received and accrual when services are rendered. With cash, the expenses are recognized when paid and accrual when you are obligated to pay it.

You can use one for reporting on your returns and one for the method of accounting.

DavidW5 (North Carolina)
Posts: 565

Posted:

In my opinion accrual accounting gives a much more accurate and useful basis for managing the finances of an HOA. Our bylaws require that the monthly financial statements be reported on an accrual basis. Unfortunately, our management agent seems unable or unwilling to enter accruals properly (our board is still controlled by the developer). The auditor only comments on the year-end statements and by the time the audit is released to members it is near the end of the following year. I just have to shake my head when the MA reports at a quarterly board meeting that we are "underspent by $75,000". In reality there are numerous bills for services that have been received that are not yet paid and which should have been accrued that would more than consume that $75,000. The board and membership are left with the impression that costs are being managed to stay within budget when, in fact, the reports are useless for determining the true financial status of the HOA.

Dave

DaneC (California)
Posts: 210

Posted:

In California Civil Code 1365.2.(a)
(C) Interim financial statements, periodic or as compiled, containing any of the following:
(i) Balance sheet.
(ii) Income and expense statement.
(iii) Budget comparison.
(iv) General ledger. A "general ledger" is a report that shows all
transactions that occurred in an association account over a
specified period of time.
The records described in this subparagraph shall be prepared in
accordance with an accrual or modified accrual basis of accounting.

Definition from a CPA -

MODIFIED ACCRUAL METHOD OF ACCOUNTING

Often, monthly financial statements are prepared using the Modified Accrual Method of Accounting. Under this method of accounting, transactions are reported as follows:

• Members' assessments are reported on the Accrual Method, whereby dues (assessments) are recognized when earned (billed - as of the first of each month), not when received.

As a result, whenever dues are not paid in the same month that they are billed, an amount for Assessments Receivable (if paid late), or Prepaid Owner Assessments (if paid early) will be listed on the face of the Balance Sheet.

• Expenditures are generally reported on the Cash Method, whereby expenses are reported when paid, not when incurred.

This method of accounting enables the preparer to expedite the preparation of the monthly financial statements in order to meet the needs of the Board of Directors. However, selected expenses may be reported on the Accrual Method if the information is received on a timely basis.
The Modified Accrual Method of Accounting can be in conformity with GAAP (which requires the Accrual Method of Accounting) if the amounts reported using the Cash Method for expenditures are not materially different from the amounts that would have been reported using the Accrual Method. Generally, an amount is material to the financial statements if its omission would mislead the reader of the financial statements, but usually the difference is not material.

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