A Manager's Perspective...
There are two basic general accounting methods. However, there always seems to be some confusion when it comes to these methods and how or when to use them. Each method has its own advantages and disadvantages. But overall, the main difference between the two systems would be the timing of the transactions and when they are recorded. We will provide a brief review of each accounting method in this article.
Cash Accounting
When using the cash accounting method you record income when it is received by the association and you record expenses at the time you write a check to a vendor.
The disadvantage with the cash method is that the Board or Management is unable to see the amount of assessments that were still owed to the association or the amount of outstanding bills or debt that the association has. Other problems would be if there are quarterly assessments or prepaid assessments, the cash method would typically overstate the income for that month. In cases of quarterly income, it overstates the association’s income by 2 months. Cash accounting does not distinguish between current cash or prepaid cash.
The advantage of this method is that it more accurately represents the amount of cash the association has at that point in time.
Accrual Accounting
When using the accrual accounting method you record the income when it is billed to the owners, regardless of when the income (receivables) is actually received or paid. Expenses are recorded when you receive the goods or services (payables or invoice) even though you may pay at a later date.
The disadvantage with the accrual method, especially when an association is facing a large amount of delinquent units and foreclosures, is that your assessment income (which is recorded at the time it is billed) is overstated and you never quite have a handle on when you may get paid for past due assessments. Therefore with the accrual method there are balance sheet report items that record and account for these amounts that are owed or remain unpaid.
The advantage of this method is that it more accurately reflects the overall financial health of the association from month to month. Income and expenses are matched for that reporting period, thus producing an accurate Net Income or Loss report.
So which method should we use?
Chapter 718 (Condominium Associations), in most cases, requires accrual based accounting, whereby Chapter 720 (Homeowners Associations) does not specify a required method. Both Chapter 718 and 720 require that financials statements be prepared in accordance with generally accepted accounting principles.
Should you have further questions about the two accounting methods do not hesitate to contact us, or speak to a Certified Public Accountant (CPA) who is familiar with Community Association accounting practices to best assist you.
