Accounting is an important function of Every Homeowners Association (HOA) and is necessary to ensure its economic activities are properly documented in order to show how well it is accomplishing its goals. HOA Messenger provides an easy way for your HOA to get started managing your HOA’s finances on an accrual basis. In this article we explain some of the key Accounting terms to be aware of when using the HOA Messenger Accounting Feature.

Accounts Receivable

Accounting Equation

Accrual Accounting

Accounting Cycle

Adjustment Entry

Assets

Bookkeeping

Budget

Chart of Accounts

Debits & Credits

Double-Entry Accounting

Equity

Expenses

Financial Statements

Income / Revenue

Journal

Liabilities

Operating Expenses

Reserve Allocation

Reserve Expenses

Retained Earnings

Statements

Transactions

Accounts Receivable is the General Ledger Account that

Assets = Liabilities + Equity. For your HOA’s books to be in balance, its Assets must equal its liabilities and its equity. This information is reflected in the balance sheet.

Accrual Accounting is a system of accounting in which income and expenses are recorded as they are earned (accrued) and incurred (accrued) whether or not cash has actually been deposited or withdrawn from your HOA’s Bank. Therefore, with accrual based accounting you may record projected payments as income prior to actually receiving the cash, and you may record projected expenses as expenses prior to the money actually being withdrawn from your HOA’s Bank. For example, with HOA Messenger, homeowner assessment payments are recorded as income on the day the payment becomes due, regardless of whether the payment is actually deposited into the HOA’s bank account because the money is owed to the Association. This is different from cash accounting where income or expenses are only recorded when the money actually changes hands (i.e. when it’s actually deposited or withdrawn). Accrual Accounting is able to paint a more accurate picture of an organizations financial status and therefore the preferred method of bookkeeping for many HOAs.

The Accounting Cycle is broken down into five steps:

If the total debit and credit balances are not equal, you will have to locate the bookkeeping errors and make corrections. The following are some areas where errors commonly occur. Mistakes transferring amounts from the ledger to the trial balance worksheet. Errors in calculating balances of ledger accounts. Incorrect amounts posted in the ledger from the journal. Debited an account instead of crediting an account or vis verse. Error in entering a transaction in a journal. Once you have located the discrepancy and corrected the balance, run the trial balance again until the total debits and credits match.

For an example of how to make an Adjusting Entry using HOA Messenger, CLICK HERE.

In the context of most HOAs, Assets are usually the combined amount of money in the HOA’s Operating Bank Accounts, its Reserve Bank Accounts, and its Accounts Receivables Account.

In the context of HOAs, bookkeeping is the recording and description of all transactions that occur for your HOA. A bookkeeper is the person who produces and maintains these records. A bookkeeper’s role is different from that of an accountant. A bookkeeper simply maintains the books, but accountants can provide analysis and recommendations based upon what’s in the bookkeeper’s records.

Budgeting in the context of HOAs is the process of allocating the scarce resources (most commonly income from assessments/dues from residents) to ensure the maintenance and administrative responsibilities of a particular HOA can be fulfilled responsibly. Typically HOAs are required to establish a budget prior to the start of each fiscal year and should include the types and amounts of anticipated revenues and the types and amounts of authorized planned expenses.

Note: The Chart of Accounts (COA) list all the different of Asset Accounts, Liability Accounts, Equity Accounts, Income/Revenue Accounts, and Expense Accounts that your HOA has, or categories of these account types that your HOA expects to account for in the future. A bookkeeping account should be created for each of these

Asset COA Examples: Retained Earnings, Main Checking Account, Petty Cash, or Reserve Checking Account, or a Certificate of Deposit.

Liability COA Examples: Pre-paid Assessments, Pending Loans etc.

Equity COA Examples: Reserve Allocations such as Asphalt/Streets, Termite Tenting, Roofs, Painting, Clubhouse Floors, Landscaping Renovation, etc.

Income/Revenue COA Examples: Assessments, late fees, key sales, parking pass sales, bank interest, violation fines, etc.

Expense COA Examples: Electricity, water, landscape maintenance contract, pool maintenance, paper, postage, management contract, etc.

A guide to setting up your Chart of Accounts on HOA Messenger can be found HERE.

Note: Debits and Credits may increase the amount of an account, depending which category of account is being debited or credited. Debits are transaction values listed on the right side of the Journal/General Ledger, and Credits are transaction values listed on the right side. Below is a breakdown of how Credits/Debits affect specific types of accounts. The total amount recorded as a debit, must be offset by the exact same amount recorded as credit. If the two sides of the transaction are not equal, then the books will not balance.

Asset Accounts: A debit will increase the value of asset accounts and a credit will decrease the value.

Liability Accounts: A debit will decrease the value of liability accounts and a credit will increase the value.

Equity Accounts: A debit will decrease the value of equity accounts and a credit will increase the value.

Income/Revenue Accounts: A debit will decrease the balance of income/revenue accounts, and a credit will increase the balance.

Expense Accounts: A debit will increase the balance of expense accounts and a credit will decrease the balance.

Double-Entry Accounting is an accounting system where every transaction is recorded twice, where money taken from one account must be added to another account. For example, if you need to pay an electric bill using funds from the operating account, the transaction would need to be both debited from the operating bank account in the asset section. Using the Double-Entry accounting method is the preferred method of many HOAs and is the method utilized in the HOA Messenger Accounting software.

In the context of HOAs, Equity is usually the total amount of money allocated to the HOA’s Reserve accounts, plus any additional up allocated retained earnings.

All of the costs associated with operating your HOA, such as electricity bill, paper costs, insurance, or landscape maintenance.

Note: The written record of a HOAs financial condition at a given point or period of time. Financial statements available using HOA Messenger include the Balance Sheet, Income Statement with Budget Comparison, the General Ledger, the Check Register, the Delinquency Report, and the Pre-paid report.

Balance Sheet: The Balance Sheet provides an overview of a HOA’s Assets, Liabilities, and Equity. Remember, Assets = Liabilities + Equity. This report provides a breakdown of these three financial categories at a specific point in time.

Income Statement with Budget comparison: The Income Statement with Budget Comparison provides a summary of the HOA’s Income and Expenses over a given period of time (such as a months time, or an entire year), and a comparison of the Income and expenses to the Budgeted Amounts earmarked for each category of Income or Expense.

General Ledger: The record of a HOA’s transaction data, which is taken from the

Journal then reorganized with transaction entries sorted by account type rather than transaction date. The General Ledger is the key component of the entire accounting cycle. The General Ledger represents all activities in every account listed in the Chart of Accounts, and every Account listed in the Chart wil always have a balance, and that balance can be found by looking at the transaction records listed in the General Ledger.

Check Register:

Delinquency Report: The record of money owed to the HOA by any resident who has not paid their Assessments will appear on the Delinquency Report.

Pre-paid Report: The record of money a resident has paid in advance will appear on the Pre-paid report.

Take a deeper dive into each Financial Statement by clicking HERE.

The amount of money your HOA takes in. Most of the time HOA Income / Revenue is generated from periodic (monthly, yearly etc.) Assessments, but can also include late payments, parking pass purchases, bank interest, or violation fines.

In the context of HOAs, Journals contain all of the HOAs transactions listed in chronological order. Journal entries include detailed information about each one of the HOA’s transactions, including the date, the amounts and the account that is to be debited or credited, and a description of the transaction.

Liabilities are your HOA’s outstanding obligations (money owed) such as pre-paid homeowner payments or outstanding loans.

Expenses usually withdrawn from the operating (checking) account and used for items such as the current fiscal year's printing/postage costs, or the current fiscal year's cost of maintaining a HOA's landscaping (ex. monthly landscape maintenance)

Coming Soon…

Expenses usually withdrawn from a reserve (savings) account and used for long term maintenance responsibilities such has painting a condo's buildings every ten years or re-paving the community's streets every 20 years.

In the context of HOAs, Retained earnings is the total amount of money left over that’s not otherwise allocated to a specific category.

Coming Soon…