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Community Association Accounting 101Community Association BankingMany community bylaws require funds to befederally insured in case of bank failure. To ensurethat your various funds are protected under theFDIC, each account should not exceed 100,000per tax ID in that bank.Some banks will offer additional insurance coveragefor deposits in excess of FDIC. If your bank does notoffer this protection, another option is to spreadreserve funds up to 100,000 among several banks.When considering a bank for your communityassociation, look for banks that tailor their servicesto community associations. Your CommunityAssociation banker can review your community’sreserve study to help you build a portfolio thatmatches the risk, return and liquidity needs of yourassociation.The final decision of which banker to use for eachcommunity association is the responsibility of theBoard of Directors.“Each accountshould notexceed 100,000 pertax ID in thatbank.”18

Community Association Accounting 101CHAPTER 3Choosing an Accounting MethodDeciding which Accounting method to use is not something to takelightly or to think that if you don't like it one way you can switch to theother method. When you chose your method, adherence to the initialchoice is imperative for the sake of consistency in comparing financialreports from year-to-year.19

Community Association Accounting 101Available Accounting Methods Cash Accounting: income is counted when cash(or a check) is actually received, and expensesare counted when actually paid Accrual Accounting: transactions are countedwhen they happen, regardless of when themoney is actually received or paid. Modified Accrual: this is actually the methodmost often followed for community accounting.It simply means that if an AP bill has not beenreceived for an expense incurred during anaccounting period, the expense is not recorded(accrued) until the bill is actually received.The Five Million Dollar RuleMost state laws follow the rule if your communityhas revenue of less than 5 million per year, youare free to choose which accounting method toadopt. Whichever method you use, it's importantto realize that each option has its positives andnegatives.“If yourcommunityhas revenue ofless than 5million peryear, you arefree to choose”20

Community Association Accounting 101Cash Accounting MethodCash Accounting is the simplest accounting methodfor non-accounting people to grasp. But there is adanger that it may not accurately portray the truefinancial position of the community.For example, if there is not enough money to payall the bills for the community, those unpaid billswill not show on the financial reports. The officersmay think the financial position of the communityis fine when, in fact, they are falling further andfurther into debt.When to choose Cash AccountingSmaller communities and those that do not haveutility expenses paid by the community might begood candidates for Cash Accounting. Also, selfmanaged communities where there are noaccounting professionals on the Board of Directorsmight want to consider Cash Accounting.21

Community Association Accounting 101Accrual Accounting MethodThis is the most accurate accounting methodbecause it shows the true financial position of thecommunity.“This is themost accurateaccountingIn Accrual Accounting, revenue is recognized whenmethodit is charged regardless of when payment isreceived, and expenses are recognized when thebecause itproduct or service is received or completedshows the trueregardless of when paid.financialIf a bill for a product or service is not received butthe delivery has been made or the work completed, position of thethen an ‘Accrual Entry’ is made in the Generalcommunity.”Ledger to record the expense.But it is hard for non-accounting people tounderstand accrual. They may ask “How come theelectricity expense shows 300.00 on the financialstatements but I don’t see a check to the electriccompany on the Check Register”. The answer is, ofcourse, the expense was ‘accrued’ because theelectric bill was received (or due) even though itwas not paid during the accounting period.22

Community Association Accounting 101Modified-Accrual Accounting MethodThis simpler version of Accrual Accounting simplymeans that if an AP bill has not been received foran expense incurred during an accounting period,the expense is not recorded (accrued) until the billis actually received.There is good logic for this; the communitymanager most likely needs to review each bill andapprove it for payment, and if no bill has beenreceived yet, then it can’t be approved forpayment.Under Modified Accrual, the accounts receivablesystem is generally handled the same way as it isunder the full Accrual Accounting above. SoModified Accrual mainly means differences in howand when the community expenses (payables) arerecorded on the books.23

Community Association Accounting 101Comparing Accounting MethodsWhile simpler to understand, Cash Accounting canresult in a see-saw (spiking) effect with revenue andexpense reporting.Under Cash Accounting, expenses can be high onemonth because all the bills were paid, then low thenext month because not all the bills were paidmaking it hard to judge how the community isactually doing financially compared to the budget.Both Accrual methods discussed have the effect of“smoothing out” the income and expenses fromperiod to period.“For accuracyand visibilityAccrual Accounting not only matches the incomeof the financialfor an accounting period to the expenses incurredposition of aduring that period, but it also is a better tool forcomparing actual financial results to the approvedcommunity,budget.either methodFor reasons of accuracy and visibility of the truefinancial position of a community, either method of of AccrualAccrual Accounting is better than Cash Accounting. Accounting isbetter.”24

Community Association Accounting 101Portfolio ManagementIt’s not unusual for a management company tohave a mix of accounting methods within itsportfolio of managed communities—and theaccounting software needs to be capable ofhandling the preferences of each community.A good community accounting system will let youdecide which accounting method to follow for aparticular community, and be able to handle any ofthe three accounting methods discussed above.In the event a community demands one accountingmethod over another, a well-designed accountingsoftware will give you the capability to meet thesedemands on a community-by-community basis.25

Community Association Accounting 101CHAPTER 4Setting Up the General LedgerOnce you have selected an accounting method, the next step is to setup your General Ledger. This step needs to be done regardless of whattool you use to manage your accounting, whether it is a full-featuredproduct like TOPS, or a simple solution like Excel.26

Community Association Accounting 101What is the General Ledger (GL)?The GL is the running record of all the transactionsyou do; it is the foundation of the entire accountingsystem. All subsidiary ledgers (like receivables andpayables) create GL transactions. Like a calculator, itkeeps a running tape.The General Ledger is where certain key financialreports are generated. The Balance Sheet, Profitand Loss Statement and Reserve Fund Balances areall generated out of the General Ledger.A key part of the General Ledger is the Chart ofAccounts. The Chart of Accounts is all the activeaccounts that are being kept track of within theGeneral Ledger. The Chart of Accounts is alsoavailable to all the subsidiary ledgers so there is acommon link to pass transactions from thesubsidiary ledgers to the General Ledger.“The Chart ofAccounts is allthe activeaccounts thatare being kepttrack of withinthe GeneralLedger”27

Community Association Accounting 101General Ledger SectionsThe Chart of Accounts and, therefore, the General Ledger is broken upinto these 6 sections:AssetsExpensesLiabilitiesChart ofAccountsEquityIncomeReserveFunds28

Community Association Accounting 101General Ledger Definitions Assets: Asset accounts appear on Balance Sheet, normally aDebit balance. Examples include Cash in Bank Accounts, PettyCash, CDs, Accounts Receivable, Prepaid Insurance, Land. Liabilities: Liability accounts appear on the Balance Sheet,normally a Credit balance. Examples include Accounts Payable(bills), Unearned Income, Loans (payable). Equity (or Owners Equity): Net Worth (amounts left over afterassuming all liabilities) — normally a credit balance. A debitbalance would indicate a Loss. Equity accounts appear on theBalance Sheet (Retained Earning). Income: Income accounts appear on the Income Statement,normally a credit balance. Examples include MaintenanceFees/Dues, Special Assessments, Laundry Income, InterestIncome, Rental Income, Work Order Income, Fines. Expenses: Expense accounts appear on the Income Statement,normally a Debit balance. Examples include Utilities, MonthlyLandscaping Fees, Pool Maintenance, Office Supplies, Salaries,Bank Charges.29

Community Association Accounting 101Tracking Your TransactionsTo be of maximum benefit to the users in themanagement office and also to accountants andauditors who might be examining the community’sbooks, an accounting system should keep track ofevery transaction for at least the current fiscal year.Preferably, the accounting system will let themanagement office elect to keep multiple years ofhistory readily available so that questions aboutprevious years can be easily answered.A detailed history over several years in not only the “YourGeneral Ledger but also the subsidiary ledgersaccounting(modules) of receivables (AR) and Payables (AP)should be available on demand when needed tosystem shouldresearch a question.keep multipleyears of historyavailable.”30

Community Association Accounting 101Other Features to Look For“Drill-down” from the General Ledger back to thedetails of a transaction in the subsidiary ledger is animportant tool for answering questions about whatmakes up a particular General Ledger transaction.Drill down only works when the General Ledgertransactions are tied into the subsidiary ledgers(modules). It is very handy when trying to researcha General Ledger balance—but is of maximumbenefit when multiple years of transaction historyare kept in the accounting system.Additionally, the ideal accounting system should be“date sensitive”. This means it can readtransactions by their dates. There is a majoradvantage to a “date sensitive” accountingsystem—you can reprint any report for any date inthe past and the accounting system will regeneratethe report with exactly the same information as theoriginal report that would have been generatedback on the past date. This is a huge help if areport has been misplaced or a retroactiveaccounting entry must be made which changes apreviously generated report.31

Community Association Accounting 101CHAPTER 5The Accounting CycleThe best way to ensure accuracy in your accounting procedures is tofollow a consistent process. The accounting cycles provided in thischapter will give you a standard process blueprint that you can follow.As with any process, you should check your community rules andregulations as well as state laws and make any changes required.32

Community Association Accounting 101The Accounting CycleOwner Charges(AR)Cash Receipts(AR)Print FinancialPackageThe CAMAccountingCycleBankReconciliationPrint Checks(AP)BoD InvoiceApproval (AP)Late FeeProcessing (AR)CollectionActions (AR)Add Vendors& Enter Bills(AP)Here’s a typical accounting cycle for a community association. Thisaccounting cycle applies to a single community, and does not includeaccounting operations for your management company, nor does itincorporate shared accounting operations for multiple communitiesin your portfolio. Of course, there are also other areas of communitymanagement that are not covered here, such as maintenance,owner and board communications, and deed enforcement.33

Community Association Accounting 101Two Basic Functions in the Cycle Bills Receipts Interest Fees Transfers Loans Data EntryRecording Balances Statements RegistersReportingIt may seem like a lot of steps, but in fact,there is a lot of overlap. In general,community accounting is broken into twobasic functions: Recording and Reportingfinancial transactions. Each of those can befurther broken down into tasks:Recording financial transactions & eventsPaying a billReceiving an owner paymentRecording interest on a bank accountCharging a homeowner a feeTransferring cash from one bank accountto another Obtaining a loan Reporting on financial information Balance SheetIncome StatementGeneral Ledger or Trial BalanceOwner Balance DueAP Check RegisterReserve Fund BalancesOther Subsidiary Ledger Reports34

Community Association Accounting 101Processing Receivables1. Process Owner Charges: Includesapplying owner charges, printinginvoices or coupons, automatedbilling and balance inquiries2. Process Cash Receipts: processTheReceivablesCycleowner payments receivedthroughout the period3. Late Fee Processing: assess late feesfor owners that have exceeded thepayment window as laid out in thecommunity documents.4. Collection Actions: determinedelinquent owners, write letters toinform them of actions to be taken,assess fines, escalate delinquenciesto attorney in compliance withcommunity bylaws.5. Print AR Reports: reports showingowners with balances due and thestatus of collection action and anyother AR reports requested by thecommunity officers.35

Community Association Accounting 101Processing Payables1. Enter Bills to Pay: Add vendors toyour accounting system as neededfor bills that you receive for thecommunity, and enter those billsinto the system2. BOD invoice approval: compile billsThePayablesCycleto be paid and present the list tothe association’s Board Of Directorsfor approval.3. Print Checks: For approved invoices,write checks or pay bills online onbehalf of the community.4. Print AP Reports: Print a CheckRegister listing all checks writtenduring the accounting period andany other AP reports requested bythe community officers.36

Community Association Accounting 101Processing Receivables1. Make Manual Adjusting Entries:like accruals or to book transactionsthat did not get recorded already bythe AR or AP modules.2. Bank Reconciliation: Reconcile bankTheGeneralLedgerCycleaccount statements with actualvalues from the period. Makeadjustments in the general ledger asnecessary.3. Print Financials: Generate thefinancial reports package fordistribution to the community’sboard of directors.Note: If you use TOPS for yourcommunity accounting software youcan define a “Board ReportingPackage” that prints all the financialreports at once rather than piecemealin each accounting module.37

Community Association Accounting 101CHAPTER 6Monthly Board Financial ReportsTo have a true understanding of your communities’ finances, you needmore than just a collection of monthly totals; you need to understandwhat your numbers mean and how to use them to answer specificfinancial questions. The answers to specific financial questions areanswered in your Month End Reports.38

Community Association Accounting 101Giving the Board what they WantPersonal choices often determine what BoardMembers want to read in monthly reports or whatinformation they want the report to display.My philosophy on that has been that you should doeverything that is REASONABLE to accommodateyour board members, but if it takes 2 days and yourentire accounting team to create these reports it’snot reasonable, and definitely not worth the timeor effort.I’ve seen board members who just wantedredundancy in the reports – you only need 1balance sheet if it is created correctly – you do notneed a balance sheet broken out into anotherbalance sheet. Your classic month end report tellsthe whole story of the community’s financial status.Your own knowledge of your reports will be yoursaving grace. I have had numerous clients that havefaced the Board – and when asked a questionregarding a certain entry on a report, they crumble.Be sure you are educated on the numbers you areproviding.“You should doeverything thatis reasonable toaccommodateyour boardmembers”39

Community Association Accounting 101Giving the Board what they NeedThe first order of business that should beconducted when you take over management of acommunity or a new board or board memberenters the equation, is to sit down with them andgo through your monthly reports package (oftencalled Monthly Financials) and explain with notesand highlights exactly what is being reviewed andhow the reports come together to give the board acomprehensive picture of the community’sfinancial health.Believe me, teaching the board how to read thereports and to educate them in what they areseeing is a battle worth winning; it can make yourBoard meetings far more pleasant in the future!No matter what software you use to manage yourcommunities, even a paper ledger sheet, thefollowing reports will satisfy any of your boardmembers – no matter how picky they are!“Teaching theboard how toread thereports and toeducate themin what theyare seeing is abattle worthwinning”40

Community Association Accounting 101Key Financial ReportsThe reports in your monthly financial packageshould have all pertinent information on thembroken out into 5 reports.If you have all the information listed correctly onthese reports in standard accounting forms, yourfinancials will be on point every month and fullytransparent.The required reports are: Balance Sheet Profit & Loss Statement Owner Balances Aged Payables Check RegisterOptionally, consider including: Bank Reconciliation Homeowner Deposits41

Community Association Accounting 101Balance Sheet ReportThe first report we will review is the Balance Sheet – your balance sheetshould contain all1.Assets, which consists of:a. Cash Accounts (as in your bank accounts) you want to make sureyou have them all listed in the top section of your balance sheet.They should have the ending balance for the month.b. Accounts Receivables should be listed next – this is the outstandingdues that are owed to the Community – this can include fees/ fines.c.Prepaid Insurance- these are insurance premiums paid in advance.d. Now y

Community Association Accounting 101 Nancy Marry is the Technical Support Team Lead for TOPS Software. Her background in goods and services accounting provided the inspiration for an article on How Goods & Services Accounting Differs from CAM Accounting, which in turn inspired this eBook