HOA Reserve Fund Accounting: Keeping Reserves Apart From Operating Money, Month After Month

What is HOA reserve fund accounting?

HOA reserve fund accounting keeps the association's savings for big repairs apart from its operating money. The reserves have their own fund in the books and their own bank account.

If the reserves are only a number in a spreadsheet and the cash sits in the operating account, nothing is set aside. Reserves are one of the 2 funds explained in HOA accounting explained for board members.

What is the difference between an HOA reserve fund and an operating fund?

The operating fund pays the year's regular bills from dues. The reserve fund saves for major repairs and replacements, such as a roof. Each has its own balance.

How do you record the monthly transfer to the HOA reserve fund?

Move the budgeted amount from the operating bank account to the reserve bank account. Record it as a transfer between funds, not as an expense.

1. 1Read the reserve line of the budget. At Demo Ridge HOA it is $4,200 a month: $21,000 of dues come in, $16,800 stays in operating.
2. 2Move $4,200 from the operating bank account to the reserve bank account, on the same day each month.
3. 3Record the move as a transfer between the 2 funds. It is not an expense of the operating fund and not income of the reserve fund.

The monthly transfer at Demo Ridge HOA, invented data

The transfer amount comes from the reserve line of the HOA budget template. Each of the 2 accounts is then checked in HOA bank reconciliation.

How do you record spending from the HOA reserve fund?

Pay the invoice from the reserve bank account and record it in the reserve fund against the item it replaces. The operating fund's income and expense do not change.

This month Demo Ridge HOA paid Example Roofing $18,500 for a roof repair out of reserves. Roofs are one of the components in its reserve study.

1. 1The board approves the invoice as a reserve spend, against the component it belongs to: roofs.
2. 2The invoice is paid from the reserve bank account: $18,500.
3. 3The spend is recorded in the reserve fund against roofs. The reserve balance drops by $18,500.
4. 4The operating fund's income and expense statement does not move. The spend is a reserve item, not an operating cost.

The roof repair at Demo Ridge HOA, invented data

How is interest on HOA reserve money recorded?

Interest earned on the reserve account is recorded as income of the reserve fund, so it stays with the reserves.

Whether reserve interest is taxable to the association is a question for its CPA.

How does the reserve fund appear on the HOA balance sheet?

The balance sheet has a column for each fund. Reserve cash and the reserve fund balance appear in their own column, apart from operating cash.

Here is the month at Demo Ridge HOA, rolled forward, and the balance sheet it produces.

Reserve roll-forward, Demo Ridge HOA, invented data

Balance sheet by fund, Demo Ridge HOA, invented data

Operating cash is $38,400 plus $21,000 of dues, less $15,900 of bills and the $4,200 transfer: $39,300. The reserve column stands apart. How a board reads this report is in HOA financial statements.

Can HOA reserve funds be used for operating expenses?

If it happens, the books record a loan from the reserve fund to the operating fund, shown until repaid. Whether it is allowed is set by state law and the governing documents.

If reserve cash pays an operating bill, the reserve fund shows money due from operating, and the operating fund shows the same amount owed to reserves. The board sees the loan on every report until it is repaid.

The rules on funding and borrowing reserves are a question for the association's attorney.

How does an HOA board know whether the reserve fund is large enough?

Compare the reserve balance with the fully funded balance in the association's reserve study. The result is the percent funded.

Demo Ridge HOA's reserve study says the fund should hold $310,000 today. At the start of the month the fund held $186,000, so it was 60% funded. The study sets how much to save and the budget sets the monthly transfer. We record what happens and report the percent. Where the fully funded balance comes from is in the HOA reserve study and the books.