The Communicator - Volume 1, Issue 1 - (Page 13)

• Since assessments are only recorded when received there are many opportunities for error. Assessments may not be billed for months at a time on various units. The balance of each owner’s account comes to question since there is no way to prove the total amount due to the association. • Under cash basis accounting, since revenue is booked when received, there is no accounts receivable in the general ledger or on the balance sheet. This account is very important for the purpose of proving that the balance in the detail accounts of each owner is correct. In the accrual method, at the end of each month, the total of all of the individual accounts is balanced to the accounts receivable. The prepaid balances, those owners who have paid one or more months in advance, are proven to a liability account called “prepaid assessments.” This method of check and balance is not available under cash accounting. • Civ il Code sect ion 1365 (a) (1) requires the association to prepare a pro forma operating budget on an accrual basis. If you are maintaining the books and records on a cash basis and preparing comparative income statements on that basis you would be comparing cash to accrual. This can cause a significant variance between the actual revenue and expense compared to the budgeted items. • Under cash accounting, only those expenses which have been paid will be shown on the income statement. There will be no accounts payable or accrued expenses shown on the balance sheet. This means that the expenses will be understated or overstated for any given month. As an example, consider water bills which are paid every other month; February, April, June, etc. When the financial statement is prepared for May, no water bill will be received or paid, and a zero balance would be shown for water expense for the month even though costs were incurred. If the water bill has not been received before the books are closed for June, June would also show a zero balance. Then in July when the bill for May and June is paid, the expense would show two months of expense compared to one month of budget. When the board is trying to understand the availability of operating cash to meet planned or unexpected expenses they must know not only the balance in the bank but the liabilities against that balance. Under accrual accounting, the balance sheet would reflect the current month end balance in the checking account and the liabilities against that in the form of prepaid assessments, accrued operating expenses and interfund liabilities (borrowings from reserves). With cash accounting the only information available to the board is the balance in cash. It is not unusual to see a cash balance of $11,000 which might give the board an unwarranted feeling of safety. If the same financial was prepared under the accrual method, they would know that there is a prepaid assessment balance of $11,250 and over $8,600 in unpaid bills. What that really translates to is a net overdraft in operating cash of $8,850. Remember that the prepaid assessments are next month’s money and the $8,600 is this month’s unpaid bills. The board must know how much money is already committed so they can make informed decisions regarding available cash for contracts, additional services, and normal operating needs. Only accrual accounting will give you that type of information. ACCRUAL ACCOUNTING ACCRUAL ACCOUNTING requires revenue to be “booked” when earned and expenses “booked” when incurred. This translates to the concept that if assessments are due to the association The Communicator • 13

Table of Contents Feed for the Digital Edition of The Communicator - Volume 1, Issue 1

The Communicator - Volume 1, Issue 1 Contents President’s Message Capitol Recap Complying with California’s Reserve Study and Disclosure Laws The Devil Is in the Details Ask the Experts – Deferred Maintenance HOA Banking, Then and Now 2008 Events & Education Calendar Welcome to CAI BayCen Index to Advertisers

The Communicator - Volume 1, Issue 1

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.