Page 8 - New England Condominium July 2021

8 NEW ENGLAND CONDOMINIUM
-JULY 2021
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able, Receivable, and Accrual balance sheet
accounts are not used, and budgeted cash
receipts or disbursements are not part of the
reporting process.
What Is Accrual Accounting?
With accrual accounting, revenue and
expenses are recognized in an association’s
fi nancials during the time period in which
the expense or revenue was incurred, which
may not necessarily align with when the cash
transaction occurs.
For example, under the accrual method,
an association typically recognizes the full
amount of assessed fee revenues on the fi rst
day of the month, even though many unit
owners have not yet paid their fees. Before the
fees are received, the asset is recorded in the
Accounts Receivable account. As owners pay
their assessments, the revenue is recognized
in the cash account, while simultaneously
decreasing the Accounts Receivable balance.
Th e receipt of cash into the association’s bank
account simply changes the classifi cation of
the asset on the balance sheet from Accounts
Receivable to Cash.
Likewise, expenses are recorded when
goods or services are received from a vendor,
rather than when the invoice is paid. For ex-
ample, though landscaping services rendered
at the end of April may not be invoiced and
processed until early May, the association
will still record the expense on April’s income
statement. Since the payment of the April
landscaping service didn’t occur until May, an
accrual is made as of 04/30/202X to recognize
that the service was in fact received in April.
Th e accrual journal entry increases both Total
Operating Expenses on the Income Statement
as well as an Accrued Expense liability ac-
count on the Balance Sheet. Th us, this journal
entry records the expense in the period when
ACCRUAL VS. CASH
continued from page 1
the service was delivered, and also recognizes
that the Association has a current liability that
will need to be paid. Th e accrual is reversed
next month when the invoice is entered and
payment is made.
Our fi rm applies this method of accrual
accounting for predictable expenses—like
monthly contracts, for example—to ensure
the highest level of accuracy in the monthly
fi nancial statements produced for the board.
Similarly, accruals are entered for utility ac-
counts such as electric, water and sewer, and
gas usage. Since these services do not always
perfectly align to a specifi c period, per diem
utility accruals are made based on the most
recently received utility invoices for a given
period to ensure that the expense of the entire
period is accounted for.
Which Is Right for My Association?
To decide which accounting approach is
the best fi t for your particular community, the
fi rst step is to conduct a needs analysis to help
your board and management fully understand
your community’s fi nancial landscape. With
that information in hand, you can then com-
pare the benefi ts of both accounting methods
in an applied, meaningful way—and then de-
termine which makes the most administrative
and fi nancial sense for your condo, co-op, or
association. Consider that:
Cash basis is simpler: Cash basis account-
ing requires less information tracking, and is a
more familiar concept to most people, which
can make it a more comfortable method with
more easily readable fi nancials. However,
this method may not fully track either the as-
sessed fees or expenses from goods or services
received.
Cash basis ties to the checkbook: Since the
cash method of accounting only records cash
transactions, it is easier to see and understand
your association’s actual cash on hand. Future
anticipated revenues and expenses are not
recognized or recorded.
Th ere is one signifi cant caveat when it
comes to cash basis accounting, however:
Cash basis is not generally accepted: It is
important to know that cash basis account-
ing does not conform to generally accepted
accounting principles (GAAP). Th erefore, it
may not satisfy the requirements contained in
your association’s organizational documents
or the statutory accounting requirements of
your state. Generally, a CPA fi rm will disclaim
an opinion if cash basis accounting is used.
Accrual benefi ts cash fl ow management:
Th is method provides more insight into fu-
ture cash infl ows and outfl ows via Accounts
Receivable and Payable balance sheet ac-
counts. Having AR and AP on the monthly
balance sheet (and perhaps also having de-
tailed supporting schedules) allows anyone
reading an association’s fi nancials to better
understand the timing of cash receipts, as well
as the amount of liabilities that must be paid.
Certainly the collection of outstanding assess-
ments due, and related collection issues, is a
very important issue for many associations.
Accrual gives a fuller, more complete view:
continued on page 10
ing the biggest surge since her agency began
tracking such data in 2006, partially because
of the size of the units being purchased.
The Future
At this point, there seems to be an abiding
sense of hope that fall will bring a complete
reopening of US offi ces and schools, as well as
international travel, and with it the resump-
tion of “normal” co-op and condo activity in
the U.S.
Most of all, as the country tip-toes out of
the pandemic that brought the world to its
knees, people are making changes to their life-
styles and to their priorities in profound ways,
and this will have implications for residential
real estate long into the future. Industry pros
advise that to meet this moment, staying com-
petitive will require constant reassessment of
promotional practices and a willingness to
adjust accordingly.
n
Darcey Gerstein is Associate Editor and Staff
Writer for New England Condominium.
HOW HAS COVID...
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