Accrual or Cash Basic Financials

KatL (Alabama)
Posts: 19

Posted:

Our company has managed HOA communities for over 15 years & have always distributed monthly financials to the board of directors on a cash basis vs an accrual basis.

Do you process on a cash basis or accrual and why? Thank you for your input!

JohnC46 (South Carolina)
Posts: 14,265

Posted:

We used a Cash Basis but was advised by our MC/accountant that the accounting world preferred an Accrual Basis. Actually a modified Accrual Basis. Anybody can understand a Cash Basis as that is how most people run their own little financial world. When switching, the owners have to be educated.

LoriM15 (Florida)
Posts: 1,009

Posted:

Our management company does accrual accounting which drives our treasurer crazy. The treasurer tried to get it changed but our accountant (we are audited every year per our bylaws) said she preferred accrual accounting also.

MaxB4
Posts: 3,513

Posted:

I have been using a modified cash accrual for the past 14 years.

KerryL1 (California)
Posts: 14,550

Posted:

Our HOA has been using modified accrual for a really long time.

TimB4 (Tennessee)
Posts: 21,061

Posted:

Cash Basis.

It's the same basis as a family savings/checking accounts. This makes it easy for everyone to understand and most to be able to fill the job as treasurer.

As others have said, most accountants prefer accrual but either basis is a general accepted accounting principal (GAAP).

KellyM3 (North Carolina)
Posts: 2,239

Posted:

We have a property manager so our budget is based on accrual accounting. Accrual accounting ensures the budget is accounting for monthly bills not yet received. Cash accounting accounts for revenue and expenses as they are received.

You see "down the road" a bit further with accrual accounting into the future but small HOAs work great with cash accounting, especially if self-managed.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By LoriM15 on 03/22/2022 5:19 PM
Our management company does accrual accounting which drives our treasurer crazy. The treasurer tried to get it changed but our accountant (we are audited every year per our bylaws) said she preferred accrual accounting also.

Lori

If your Treasurer cannot understand Accrual, they should not be Treasurer.

TimB4 (Tennessee)
Posts: 21,061

Posted:

Quote:

Posted By JohnC46 on 03/23/2022 8:23 AM

Lori

If your Treasurer cannot understand Accrual, they should not be Treasurer.

If that is the standard, then it's likely many who volunteer wouldn't be able to be treasurer.
Realistically, most HOAs don't have the luxury of finding volunteers with the background required to fulfill the officer positions of a corporation. They are happy to just find volunteers.

JohnT38 (South Carolina)
Posts: 1,631

Posted:

Quote:

Posted By TimB4 on 03/23/2022 8:48 AM

Posted By JohnC46 on 03/23/2022 8:23 AM

Lori

If your Treasurer cannot understand Accrual, they should not be Treasurer.

If that is the standard, then it's likely many who volunteer wouldn't be able to be treasurer.
Realistically, most HOAs don't have the luxury of finding volunteers with the background required to fulfill the officer positions of a corporation. They are happy to just find volunteers.

Boy is this true. I was happy to just find someone that was capable of critical thinking and a desire to learn.

BarbaraT1 (Texas)
Posts: 821

Posted:

Quote:

Posted By TimB4 on 03/23/2022 8:48 AM

Posted By JohnC46 on 03/23/2022 8:23 AM

Lori

If your Treasurer cannot understand Accrual, they should not be Treasurer.

If that is the standard, then it's likely many who volunteer wouldn't be able to be treasurer.
Realistically, most HOAs don't have the luxury of finding volunteers with the background required to fulfill the officer positions of a corporation. They are happy to just find volunteers.

Accrual accounting isn't hard to understand. It's just an awareness of future income and expenses. Presumably anyone who has purchased a home is familiar with the concept of a known, monthly expense that should be factored into your bank balance even if it hasn't been deducted yet.

MaxB4
Posts: 3,513

Posted:

Quote:

Posted By BarbaraT1 on 03/23/2022 9:51 AM

Posted By TimB4 on 03/23/2022 8:48 AM

Posted By JohnC46 on 03/23/2022 8:23 AM

Lori

If your Treasurer cannot understand Accrual, they should not be Treasurer.

If that is the standard, then it's likely many who volunteer wouldn't be able to be treasurer.
Realistically, most HOAs don't have the luxury of finding volunteers with the background required to fulfill the officer positions of a corporation. They are happy to just find volunteers.

Accrual accounting isn't hard to understand. It's just an awareness of future income and expenses. Presumably anyone who has purchased a home is familiar with the concept of a known, monthly expense that should be factored into your bank balance even if it hasn't been deducted yet.

Better yet, HOA dues.

BarbaraT1 (Texas)
Posts: 821

Posted:

Quote:

Posted By MaxB4 on 03/23/2022 10:38 AM

Posted By BarbaraT1 on 03/23/2022 9:51 AM

Posted By TimB4 on 03/23/2022 8:48 AM

Posted By JohnC46 on 03/23/2022 8:23 AM

Lori

If your Treasurer cannot understand Accrual, they should not be Treasurer.

If that is the standard, then it's likely many who volunteer wouldn't be able to be treasurer.
Realistically, most HOAs don't have the luxury of finding volunteers with the background required to fulfill the officer positions of a corporation. They are happy to just find volunteers.

Accrual accounting isn't hard to understand. It's just an awareness of future income and expenses. Presumably anyone who has purchased a home is familiar with the concept of a known, monthly expense that should be factored into your bank balance even if it hasn't been deducted yet.

Better yet, HOA dues.

Well, you bring up a good point. I can't count how many people have complained that their assessment is due "right after Christmas" and when I suggest pre-paying (or just saving for it) in smaller increments throughout the year, it blows their minds.

PatJ1 (North Carolina)
Posts: 568

Posted:

Cash accounting plays havoc on monthly budgets. Income=money in when received, expenses=money out when the check is written.

Great if everyone pays and it's deposited by the end of month. Not so, when the check is deposited the next month. Also, the same with invoices. How many Cash accounting systems show no water bill paid one month and 2 the next? Or an expense billed in December included in that year's budget, and then paid in January skewing the new year's budget.

Some MC's use a hybrid method for dues receipts. The balance sheet will show an accounts receivable. Few MC's record expenses on an accural method. It's expensed the day the check is written.

Add a quote signed in October against that year's budget and the work doesn't begin until January messing with the new budget.

I'll spare you the bookeeping entires necessary to accrue a cash accounting method so the HOA knows more about where their finances are. Or covering entries for outstanding Purchase Orders that post to a liability account for an obligated expense, (the quoted amount). Also, when filing for an FEIN # with the IRS, you choose an accounting method, Cash or accrual for tax return filings. Year end adjustments are made so the tax return doesn't match the financial statement.

For HOA's to be able to follow the monthly budget vs. actual Profit & Loss statements, accrual is my choice. Income is posted when expected, fixed monthly expenses are shown in the month incurred, and variable expenses can be easily identified and explained.

We are condo's with monthly dues and many monthly expenses.

JackG8 (Virginia)
Posts: 26

Posted:

Definitely cash basis. If you're printing up financials for Board members to review, it makes it much easier for Board members, who more times than not, are unfamiliar with financial statements. being able to see monthly payments being made for landscapers, garbage collections, etc. simplifies the statements for the Board members. I've read that it makes it easier for the accountants to audit the financials, but in reality, if all they see are entries on the P & L, they actually have to go through an audit to ensure those entries aren't just processed through the balance sheet. Accountants should be able to break down such entries as yearly D&O insurance policies that are paid once a year for the purpose of completing taxes, without any hassle.