Financial Statements  Continued From Page 17


Full Accrual Basis (continued)


Assessments are recorded when billed to owners, and typically represent budgeted amounts. The aggregate cumulative uncollected balances for all owners are combined and presented on the balance sheet as accounts receivable. As owners’ payments are received, accounts receivable balances decrease.


Under the accrual method, assessments are recognized as income when earned, typically on the first of each month.


Assessments received from owners before assessments are earned are considered prepaid. Under the accrual method, assessments are recognized as income when earned, typically on the first of each month. If an owner pays their assessments before they are due, the association does not recognize the assessment immediately, thus recording the receipt as prepaid. On the first of the next month, the prepaid assessment would be recognized as income.


Expenses that have been incurred but not paid as of the month or year-end should be accrued. An expense will typically be recorded based on vendor invoices or contracts. On the balance sheet, the aggregate total of all expenses incurred but not paid will be presented as accounts payable or accrued expenses.


Depending on the extent of delinquencies, a bad debt provision may be required.


When reviewing accrual basis financials, readers should develop an understanding of the relationships between cash balances, accounts receivable and other asset and liability accounts to revenue and expense accounts. If assessments have been billed but owners have not paid, accounts receivable will increase. Depending on the extent of delinquencies, a bad debt provision may be required. Further, the Board of Directors should review the impact


18 Community Associations Journal | July-August 2021


of unpaid assessments on cash balances. If delinquencies are significant, boards may need to review budgeted expenditures and decrease monthly costs in order to retain acceptable cash balances.


Consistency


Whichever basis of accounting is used, accountants, bookkeepers, managers and boards should ensure that the basis is applied consistently.


Initial Questions


Returning to our questions at the beginning of the article, comparing actual results to budgeted amounts is a commonly applied tool to see how an association’s operational results compare to plan. Under the cash basis, assessment income might have been originally earned in any accounting period. Maybe the receipt represents a balance an owner owed from two years ago. Should that be presented as current period income? Under the cash basis, it would be. Under the accrual basis it would not.


What if the current financials report expenditures far below budget? That could be caused by various things: under the cash basis invoices may not have been paid or recorded. In the next period, the cumulative unpaid invoices are paid and recorded as an expense, further making comparison to budget challenging.


Identify Your Basis


We encourage boards, owners and other readers to understand what basis of accounting is used for their association’s financials. Without that knowledge it is difficult to fully understand the accuracy and usefulness of the financial statements.


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