The successful financial management of a condo, co-op, or homeowners association relies upon accurate, timely, and consistent financial statements. These statements represent the financial position and results of operations of the association, and understanding the details of these financials is essential to making sound management decisions. Also fundamental to this process is choosing the appropriate accounting method for your association.
Accrual vs. Cash Basis Accounting
In selecting an accounting method, trustees or board members should fully comprehend the differences between accrual and cash basis accounting. The differences in the methodologies have a material impact on how financial information is presented and evaluated by users, and therefore influence how they make far-reaching business decisions for their associations.
The fundamental difference between the two methods is rooted in the timeline in which expenses and owner assessments are recognized and recorded in financial statements. While each method has its advantages, our company primarily uses accrual accounting to create detailed monthly financial packages for our client associations—though sometimes a modified cash basis is requested and used.
What Is Cash-Basis Accounting?
In cash-basis accounting, transactions are recognized in an association’s financial records at the time when cash is received or disbursed. Put another way: the association only records transactions when they are reflected in the association’s bank account—cash in, and cash out. Therefore, assessment revenues are recorded when an owner pays their assessment and cash is received. Likewise, expenses are recorded only when a check is cut and payment is made to a vendor. This method is familiar to anyone running a household budget with a checking account, and so is often requested by smaller associations looking for a more simplified financial overview. Under a cash-basis approach, Accounts Payable, 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 financials during the time period in which the expense or revenue was incurred, which may not necessarily align with when the cash transaction occurs.