Wrting off Bad Debts?

Started by FrancescaM • 6 replies • 3604 views

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FrancescaM
Posts: 261

Posted:

This is a term I have not heard before. Our Boards atty advised us that we can use this as a line item to anticipate bad debts... homeowner's who have not paid up obviously.

Had anyone else heard this?

GeorgerwilliamsW
Posts: 972

Posted:

Quote:

Posted By FrancescaM on 01/21/2009 3:17 AM
This is a term I have not heard before. Our Boards atty advised us that we can use this as a line item to anticipate bad debts... homeowner's who have not paid up obviously.

Had anyone else heard this?

This was just recently discussed in another thread:

http://www.hoatalk.com/Forum/tabid/55/view/topic/forumid/1/postid/64955/Default.aspx

Writing off an uncollectable (i.e., bad) debt is part of doing business for an association, just like it is for any business. It is a cost of doing business. It is (essentially) an expense item, although it may be shown as a offset to income.

Your association budget should have either an allowance for uncollectable fees on the balance sheet, or an offset for uncollectable fees on the income/expense statement (i.e., budget). In business it is called "Allowance for doubtful accounts" and is an estimate of the amounts of accounts receivable that will not be collected. It is essentially, just like any other expense (but is shown as an offset on the income or asset side).

RogerB
Posts: 4,986

Posted:

Quote:

Yes, Frances. Bad debt needs to be accounted for in the financial reports. How it is done depends on the type accounting used - accural, modified accural, or cash basis. Bad debt should be shown only after the Board determines the funds can not be effectively collected and declares it.

GeorgerwilliamsW
Posts: 972

Posted:

Roger has added something important here. An association budget, wisely prepared, should have an offset that estimates the amount of uncollectable fees. (See the previous thread I referenced early.) Such a offset is a conservative accounting procedure that helps assure that the association will not budget for expenditures greater than the revenues it reasonably expects to receive.

However, uncollected fees remain on the books as an asset unless and until the board determines that (1) the fees are likely never to be collected, or (2) only a portion of the amount outstanding is likely to be collected. It is up to the board of directors--and only the board--in a homeowners association to vote to write off such non performing assets.

FrancescaM
Posts: 261

Posted:

Quote:

Posted By GeorgerwilliamsW on 01/21/2009 9:30 AM
Roger has added something important here. An association budget, wisely prepared, should have an offset that estimates the amount of uncollectable fees. (See the previous thread I referenced early.) Such a offset is a conservative accounting procedure that helps assure that the association will not budget for expenditures greater than the revenues it reasonably expects to receive.

However, uncollected fees remain on the books as an asset unless and until the board determines that (1) the fees are likely never to be collected, or (2) only a portion of the amount outstanding is likely to be collected. It is up to the board of directors--and only the board--in a homeowners association to vote to write off such non performing assets.

Thank you for wonderful feedback and advice... it's much appreciated!!

RobertR1
Posts: 5,115

Posted:

Francesca,
First are you HOA or Condo? If condo make double sure your read your documents about collection of assessments.

George and Roger look at this "bad debts" business as an accounting entry to account for money, and no doubt they are the experts here. Me, I tend to look at it like a community problem and your documents or state statute may have provisions that direct what should be done if you are non-profit and are licensed by the state. Just consider checking that out before you write off anything, sort of a double CYA when a member might want to know why your BOD took the action.

MaryA1
Posts: 6,993

Posted:

Francesca,

At this time when bank and mortgage co foreclosures are at an all time high, it's wise to allow for bad debts. My assn PM keeps on top of all the bank and mort. co foreclosures and presents the info to the board each month so they can make a determination of the amount of delinquent assessments that should be written off. The budget carries a line item for bad debts. The rate of foreclosures in our assn is at about 2%, as compared to approx. 10% for our city.

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