HOA Accounting Explained for Board Members: Dues, Funds, Statements and Who Does What

What is HOA accounting?

HOA accounting is how an association records its dues, its bills and its operating and reserve money, so the board can show owners where the money went.

An association collects money from its owners and spends it on the shared property. The books show every owner that the money went where the budget said it would.

The words you will meet

How does HOA accounting work?

The board adopts a budget, owners are billed dues, bills are paid from operating money, a set amount moves to reserves each month, and the board gets a monthly report.

1. 1The board adopts a budget for the year: the operating bills, and how much goes to reserves. How that budget is built from the last year is in how to prepare an HOA budget.
2. 2Owners are billed dues. Each payment is matched to its owner.
3. 3Bills are paid from the operating account and recorded to their line.
4. 4Each month the budgeted amount moves from the operating account to the reserve account.
5. 5The board gets a monthly report. At year end the books go to the association's CPA for the return and any audit or review. What the CPA needs is in getting ready for the HOA's audit or review.

Which accounting method does an HOA use: cash, accrual or modified accrual?

An HOA can use cash, accrual or modified accrual accounting. Accrual shows dues owed and bills owed, so it gives the board the fullest picture. State law or the governing documents may set the method.

Ask the association's attorney which method your association must use. The books work the same way under all 3; only the timing of the entries changes.

What is fund accounting in an HOA?

Fund accounting keeps separate records for separate purposes. An HOA has an operating fund for the year's bills and a reserve fund for big repairs, each with its own balance.

The reserve fund only protects the association if its money sits apart from operating cash. How that is recorded each month is in HOA reserve fund accounting.

How are HOA dues and assessments recorded?

Each owner has an account. Dues are recorded as owed when billed and as paid when the money arrives, so the board can see who is behind and by how much.

• When dues are billed, each owner account shows the amount owed, and the association shows dues income for the month.
• When an owner pays, the payment is matched to that account and the balance owed goes down.
• An owner who does not pay keeps a balance, which ages: under 30 days, 31 to 60, 61 to 90, over 90.
• A special assessment is billed the same way, often in parts, and tracked on each owner account until paid.

The entries for each kind of charge are in recording HOA dues and special assessments.

Which financial statements should an HOA board read each month?

5: a balance sheet by fund, income and expense against budget, a reconciliation for each bank account, a list of owners behind on dues, and reserve activity.

• Balance sheet by fund: what does the association own and owe, and how much of it is reserves?
• Income and expense against budget: are we on plan this month and this year?
• Bank reconciliations: does the cash in the books equal the cash at the bank?
• Owners behind on dues: who owes, how much, and for how long?
• Reserve activity: what moved in and out of reserves this month?

What to look for in each one, and the red flags, is in HOA financial statements.

Who does what in HOA accounting: the board, the treasurer, the bookkeeper and the CPA?

The board approves the budget and reads the reports. The treasurer watches the money. The bookkeeper keeps the records. The association's CPA does the audit or review and the tax return.

The treasurer's own list, month by month, is in HOA treasurer duties. How the bookkeeper's job and the CPA's job fit together is in HOA bookkeeper vs CPA.

What does one month of HOA accounting look like?

Dues come in, bills go out of operating, the budgeted amount moves to reserves, both bank accounts are reconciled, and the board gets a report that shows all of it.

Here is one month at Demo Ridge HOA, 60 homes, dues $350 a home.

1. 1Dues are billed: 60 homes at $350, $21,000.
2. 2Payments come in and are matched to owners. 4 owners are behind, $4,900 in all.
3. 3Bills are paid from operating: landscaping $4,200, insurance $3,100, management $2,400, utilities $2,900, repairs $2,300, office $1,000. Total $15,900.
4. 4$4,200 moves from the operating account to the reserve account, as the budget sets.
5. 5Both bank accounts are reconciled to their statements.
6. 6The board gets its report.

Demo Ridge HOA, one month, invented data

The month was $900 under its $16,800 operating budget. The reserve account started the month at $186,000 and the $4,200 went into it.

What are HOA accounting best practices?

Keep reserves in their own account. Reconcile every account monthly. Have 2 people on every payment. Compare actual to budget. Read the report before approving it.

• Keep reserve money in its own bank account, never in operating.
• Reconcile every bank account every month, and have someone other than the bookkeeper look at the result.
• Have 2 people on every payment: one prepares, one approves.
• Compare actual to budget every month, and ask about any line that is well off plan.
• Read the report before the meeting, not at it.
• Use a chart of accounts built for an association, with the 2 funds in it. Ours is the HOA chart of accounts.
• Pick software that can keep 2 funds apart. The options are in HOA accounting software compared, and what it costs to have the books kept is in what HOA bookkeeping costs.

Checking the work is normal board work, whoever keeps the books. Whether your state requires an audit or a review, and what it says about reserves, is a question for the association's attorney.