Operating fund accounting

VC (Florida(FS 720))
Posts: 118

Posted:

Hi,

I am familiar with basic cash/accrual business accounting, but may be missing some details for non-profit (HOA) accounting.

Let's say, hypothetically, your operating fund balance at the beginning of the year was $100K. Due to some reasons you spent $120K over the budget so your net loss is the same amount. Your operating fund went into negative negative ($20K). To be able to pay your bills you borrowed $120K from reserves creating a book record of $120K due to reserves (the debt will be repaid, say, though a special assessment).

So, my question is would this act of borrowing return the operating fund balance back to $100K, or should stay negative ($20K) ? My guess is that it should stay negative and can be recovered gradually by producing net income on a yearly basis.

Thanks.

ElleN (Idaho)
Posts: 4,420

Posted:

Per GAAP for a HOA, when money is moved from the reserve fund to the operating fund, with the expectation of repayment, then on the Balance Sheet, in the Assets section for each fund:

The reserve fund should have a line item called "Due Between Funds." This line item should be a negative $120,000.

The operating fund should also have a line item called "Due Between Funds." This line item should be a positive $120,000. This would return the operating fund balance to $100,000.

VC (Florida(FS 720))
Posts: 118

Posted:

Quote:

Posted By ElleN on 05/01/2023 2:51 PM
Per GAAP for a HOA, when money is moved from the reserve fund to the operating fund, with the expectation of repayment, then on the Balance Sheet, in the Assets section for each fund:

The reserve fund should have a line item called "Due Between Funds." This line item should be a negative $120,000.

The operating fund should also have a line item called "Due Between Funds." This line item should be a positive $120,000. This would return the operating fund balance to $100,000.

Ok, understood.

But the new operating fund asset (cash) is balanced by the liability "due to reserves", right ? So, the operating fund balance on the day of borrowing will still be negative, but will increase as the debt to reserves is repaid, and will reach the initial $120,000 when the last penny is paid back (assuming no income or loss for simplicity). Is this mental picture correct ?

VC (Florida(FS 720))
Posts: 118

Posted:

Quote:

Posted By VC on 05/01/2023 3:32 PM

Posted By ElleN on 05/01/2023 2:51 PM
Per GAAP for a HOA, when money is moved from the reserve fund to the operating fund, with the expectation of repayment, then on the Balance Sheet, in the Assets section for each fund:

The reserve fund should have a line item called "Due Between Funds." This line item should be a negative $120,000.

The operating fund should also have a line item called "Due Between Funds." This line item should be a positive $120,000. This would return the operating fund balance to $100,000.

Ok, understood.

But the new operating fund asset (cash) is balanced by the liability "due to reserves", right ? So, the operating fund balance on the day of borrowing will still be negative, but will increase as the debt to reserves is repaid, and will reach the initial $120,000 when the last penny is paid back (assuming no income or loss for simplicity). Is this mental picture correct ?

Repayment the debt means getting money via special assessment, of course.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Typically a reserve account is NOT a savings account. The purpose for a Reserve account is to save up money for CAPITAL improvements. Example if your HOA is responsible for roads or roofs. The money should be earmarked for that. A savings account would supplement the operational budget.

Choices are to have a special assessment, raise dues, or get a bank loan. A special assessment will be hard thing to pass especially if it's just to refund the reserve money. Many won't understand or agree to that. Raising dues can be done by a certain percentage by the Board alone. Usually 3 - 5 % yearly. However, anything higher than that takes a majority vote similar to a special assessment but more like a "special dues increase". A loan is just a "healthy" decision. It's not going to do your HOA any favors. Still going to need a special assessment or raise dues to pay it back.

Former HOA President

KerryL1 (California)
Posts: 14,550

Posted:

The purpose of the reserve account is to repair and replace existing common area components.. It is not for "capital improvements," which are NEW components.

VC (Florida(FS 720))
Posts: 118

Posted:

Sure, this part is not in dispute at all.

My question was rather technical about specific bookkeeping entries to reflect the operating fund return to normalcy as the money borrowed from the reserves, whether legitimately or not, is paid back.
I do not have experience with non-profit "fund accounting", hence, my question.

Here's my understanding of what needs to happen in the books:

a. Say, inter-fund loan from fund "R" to fund "O" happened, for fund "O" we debit cash and credit "due to reserves"; for fund "R" we debit "due from operating" and credit cash.

b. As the loan is repaid by fund "O" with money coming from assessment, for fund "O" we credit cash and debit "due to reserves" and do the opposite for fund "R".

So, at step (a), the fund "O"(the borrower) balance is unchanged, but will increase as we repay the loan (assuming no other activity happening with fund "O" except the income stream from the special assessment).

Does it sound right ?

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By VC on 05/01/2023 3:32 PM
But the new operating fund asset (cash) is balanced by the liability "due to reserves", right ?

For the operating fund, I do not see HOA balance sheets listing the money owed in the liabilities section.

"Due to reserves" is not the correct vocabulary. Do you have a background in accounting?

Quote:

Posted By VC on 05/01/2023 3:32 PM
So, the operating fund balance on the day of borrowing will still be negative,

If we are still talking about the balance sheet, then the sentence above does not make sense to me. Balance sheets are typically prepared to represent a period of a month, a quarter, or a year. (I guess some accounting software might show a negative balance just before the manager, treasurer or HOA accountant enters the "due between funds" line item for the reserve fund?)

Are you the treasurer? A director? An owner inspecting financial records?

I assume you are looking at a balance sheet. For what period does the balance sheet apply?

Quote:

Posted By VC on 05/01/2023 3:32 PM
but will increase as the debt to reserves is repaid, and will reach the initial $120,000 when the last penny is paid back (assuming no income or loss for simplicity). Is this mental picture correct ?

As repayment from the operating fund to the reserve fund occurs, I think, but do not know for sure, that what happens on the balance sheet is that the dollar figure for the "Due Between Funds" amount (1) goes down for the operating fund; and (2) becomes less negative for the reserve fund.

MaxB4
Posts: 3,513

Posted:

If you are using a modified cash accrual system, you will have a net income/loss for the period the $120K was paid out of operating. It will balance out on the retained earnings line once the full payment, through a special assessment is received.

VC (Florida(FS 720))
Posts: 118

Posted:

hanks, that's what I thought.

MaxB4
Posts: 3,513

Posted:

Quote:

Posted By ElleN on 05/01/2023 2:51 PM
Per GAAP for a HOA, when money is moved from the reserve fund to the operating fund, with the expectation of repayment, then on the Balance Sheet, in the Assets section for each fund:

The reserve fund should have a line item called "Due Between Funds." This line item should be a negative $120,000.

The operating fund should also have a line item called "Due Between Funds." This line item should be a positive $120,000. This would return the operating fund balance to $100,000.

To balance, one must be in assets, the other in liabilities. It's why it's called a Balance Sheet.

VC (Florida(FS 720))
Posts: 118

Posted:

“Due to reserves”/“Due from operating” terminology is actually widely used:

https://pcms.net/wp-content/uploads/2023/02/DEC-22-FIN-PACKET.pdf

We had the same account names at my previous condo association.

MaxB4
Posts: 3,513

Posted:

Quote:

Posted By VC on 05/01/2023 8:43 PM
“Due to reserves”/“Due from operating” terminology is actually widely used:

https://pcms.net/wp-content/uploads/2023/02/DEC-22-FIN-PACKET.pdf

We had the same account names at my previous condo association.

Nailed it

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By VC on 05/01/2023 8:43 PM
“Due to reserves”/“Due from operating” terminology is actually widely used:

https://pcms.net/wp-content/uploads/2023/02/DEC-22-FIN-PACKET.pdf

We had the same account names at my previous condo association.

I see it used here and there. I also see some listings of the "due to" amounts in the liabilities section of the balance sheet. I think "due between funds" is per GAAP.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By MaxB4 on 05/01/2023 8:25 PM

Posted By ElleN on 05/01/2023 2:51 PM
Per GAAP for a HOA, when money is moved from the reserve fund to the operating fund, with the expectation of repayment, then on the Balance Sheet, in the Assets section for each fund:

The reserve fund should have a line item called "Due Between Funds." This line item should be a negative $120,000.

The operating fund should also have a line item called "Due Between Funds." This line item should be a positive $120,000. This would return the operating fund balance to $100,000.

To balance, one must be in assets, the other in liabilities. It's why it's called a Balance Sheet.

The balancing occurs as I explained.