accounting-balance sheet

we are a Nevada Home Owners Association.Since my quesation isn't legal but is accounting the state isn't important.
In doing a once a year balance sheet we have income which is related to the home owner monthly dues.
If we have a house in forclousure and are not recieving monthly dues do we count it as income or deduct it somewhere else.

Thank you
sheldonW

Sheldon,

Because you are asking this question I'm thinking your knowledge of accounting is somewhat limited. For that reason I would certainly recommend cash accounting which means income is what has already been received and expenses are what has already been paid. I have always been in favor of including notes at the end of a financial statement. You could insert a note at the bottom of the balance sheet indicating how much assessment income has not been collected due to foreclosure and also other delinquencies. On the year-end financial statement, I always added a note indicating how much income had been received for the new year. If you have some members who pay their assessment in advance, you may want to also do this.

Roger touched on accrual accounting, which I believe is used by most management companys. It is a more difficult accounting method to understand so I certainly would not recommend it to someone who is not real familiar with bookkeeping or accounting.

You stated you are preparing a "once a year balance sheet". Frankly, I think a balance sheet and income statement should be prepared for each board meeting, whether that be monthly or quarterly. The BOD needs to be kept abreast of the assn's finances and that's the purpose of the financial statements.

The applicable accounting standard is the AICPA Audit & Accounting Guide for Common Interest Realty Associations. Unfortunately, it does not provide the method for booking of dues and assessments and collection thereof.

Recognition of revenue is discussed with the Matching Principle which involves your question of when to recognize revenue. Ideally, all of the dues and assessments would be booked and collected in the fiscal year to which they apply. That of course seldom happens. The internet link provides a good discussion of the principles and reasoning involved. Choose account names that are descriptive for your association, such as "Uncollected Dues", "Accounts Receivable, Dues" and "Prepaid Dues". To be more descriptive, each could have a fiscal year suffix. Cash received is debited to "Prepaid Dues" and then allocated by month as revenue. By using the fiscal year suffix, the balance sheet shows the degree of delinquent dues.

Dues and assessments collected in advance of the fiscal year should be booked as "Prepaid Dues" and then allocated monthly as revenue in accrual accounting. However, the amount allocated should be consistent with the cash collected for the year to avoid inflating revenues beyond the cash received. The uncollected dues and assessments remain Uncollected Dues and Assessments until the cash is received — even if received in a subsequent year. As with most accrual accounting, year-end adjustments are required to match the allocated revenue to the cash received.

Another reference, Comparison of Cash Method and Accrual Method of accounting
, may be useful.

Others have already answered your question so I won't reiterate what they said. I'll just add a related tip that worked well for us. Assuming you're working on the cash accounting method you may want to include a line item in your budget for bad debt. The accountants in the audience are probably cringing because in a cash accounting system you don't account for bad debt because you don't recognize income until it's received and you don't recognize expenses until they are paid. However if you find that you've consistently got a few units that aren't paying you might find it helpful to have an expense line item to reflect uncollected assessments just to keep your monthly cash flow figures more realistic.

The reason being if you have 100 units and the fee is $10/month, you expect to get $1,000 in income each month and budget accordingly. But if on average you find that three units are always behind you run the risk of being $30 short each month if your operating account is cut closely. If your collections process is good you will ultimately collect from the delinquents but you have no idea when (if ever) that might happen.

By throwing in an expense line item that accounted for a few units not paying each month it forced us to keep our budget down to what we could reliably expect to receive in income each month. When people finally did come current and a recovery was made we'd have surplus money that would be put into the reserve account to reduce the next year's required reserve contribution. The board adopted a motion to account for its income this way and to require all collected (surplus) funds to go to reserve when they were received. That way everything was on the up and up if anybody asked where the money was going.

As a mathematical matter you could also just reduce your income line but someone might assume you made a typo (They say 97 units but we have 100). Making it an expense is clearer.

Quote: "When people finally did come current and a recovery was made we'd have surplus money that would be put into the reserve account to reduce the next year's required reserve contribution. The board adopted a motion to account for its income this way and to require all collected (surplus) funds to go to reserve when they were received. That way everything was on the up and up if anybody asked where the money was going"

Wow, wonder it that would fly in most HOA's.

Considering the level of apathy in most HOAs I'd say yes. As long as the board is being transparent and acting with the association's interests first they're pretty much free allocate funds at their discretion. As I recall there were two owners (out of over 100) at that meeting and both thought it as a great idea because it would keep us from accidentally overspending and reduce the amount of money that we had to raise rates by each year just to cover the required reserve contribution.

If the HOA is in Nevada by law the books must be run on a full accrual basis. Using the delinquency report you can estimate how much is uncollectible and add the "Bad Debt" line item to your budget. It takes some time but it helps create an accurate accounting picture.

Here it is:

NAC 116.451 Preparation, contents and distribution of interim financial statements. (NRS 116.31142, 116.615) The interim financial statements of an association may be prepared using fund accounting or a single-column presentation and must:

1. Include, at a minimum, a month-to-date and year-to-date presentation of:

(a) The balance sheet, including operating and reserve for future repairs and replacement assets, liabilities and fund balances or members’ equity if a single-column format is used;

(b) The statement of revenues and expenses for all operating and reserve activities, presenting information about all assessments, revenues and expenses;

(c) A schedule comparing the details of the actual expenses of the association with the expenses budgeted for the association;

(d) Any changes in the fund balances to be presented on the statement of revenues and expenses if fund accounting is used; and

(e) A footnote which states that the association is in compliance with paragraph (b) of subsection 2 of NRS 116.3115 and that reserve funds have not been used for daily maintenance.

2. Be prepared on a full accrual basis.

3. Be prepared by, or the preparation of the interim financial statements must be supervised by, a person with accounting knowledge and experience in the preparation of financial statements.

4. Be distributed monthly, promptly upon completion, to the treasurer of the association, the community manager and each member of the executive board.

(Added to NAC by Comm’n for Common-Interest Communities by R205-05, eff. 9-18-2006)

As modified or cash is easier to understand, a financial on full accrual basis paints a more accurate picture of where the association is financially - for boards, owners, and prospective buyers. You are able to determine if the association is having trouble collecting fees and if they are able to pay their bills (among other things). It's gotten quite complicated, but I suppose HOA's are being treated like real operating entities now and would you expect anything less from a business you were thinking of buying or investing in? The statute also states that the financials must be prepared by someone knowledgeable. The board should be able to ask management/accounting to explain it so they can understand it. A good accountant should be able to. There are also free seminars and classes for board members re: accounting/financials. I've heard they are helpful, too.