The HOA balance sheet is an important financial tool in any given homeowners or condo association. Making sure you prepare this report accurately is essential to the financial health of your community.
What Is an HOA Balance Sheet?
The balance sheet is one of several financial statements or reports that organizations use to assess their fiscal condition. Homeowners associations are no exception. The HOA balance sheet shows you the assets and liabilities of the association. It is a quick way of getting a picture of your association’s overall financial strength.
The homeowners association balance sheet consists of three parts and follows a simple formula:
Assets = Liabilities + Equity
An association’s assets are anything that has monetary value. This includes cash accounts, reserve funds, accounts receivable, prepaid insurance, long-term investments, and land. An association’s liabilities are the amounts your association owes. This includes accounts payable, utilities, prepaid assessments, rental fees, and long-term loans. Finally, an association’s equity is what is left after subtracting your liabilities from your assets.
When your HOA has positive equity, it means your association is in good financial condition and has enough money to cover its debts. On the other hand, negative equity signals that your association isn’t doing so well. It means more money is going out of the association than coming in. Thus, you need to start reevaluating your association’s finances.
The Importance of HOA Balance Sheet Accuracy
Homeowners associations must regularly prepare financial statements, including HOA balance sheets, to assess its finances. Most of the time, HOA boards lack the qualifications or expertise to do this themselves and, thus, require the help of a Certified Public Accountant (CPA) or management company.
Additionally, in some states, it is mandatory for HOAs to prepare such statements and distribute them to their membership. For instance, in California, Civil Code Section 5305 requires that a copy of the financial statement review be distributed to members within 120 days following the end of the fiscal year.
But, the importance of an accurate HOA balance sheet goes beyond the requirements of the state or your governing documents. As previously stated, the balance sheet provides you with a snapshot of your association’s financial health. It allows you to see whether or not the HOA is in stable condition, at least in the sense of its finances. With the balance sheet, you can determine if your association has enough money to pay for its obligations and debts.
Accuracy is key when preparing financial statements. With erroneous numbers, you can’t aptly find out what your financial standing is. This could lead to the misconception that your association has more money or fewer debts than it actually has. Operating under an incorrect notion gives you a false sense of security. You might spend more money than you have, resulting in even greater debts.
While you can generally update your balance sheet any time you like, it is good practice to do so at the end of every month. This allows you to keep a tight leash on your finances and make adjustments when necessary.
The Role of HOA Management Software
Although you can rely on manual accounting processes, the advent of management software has made it infinitely more efficient and convenient to stay on top of your HOA’s finances. Here are just some of the ways HOA software can help with balance sheet preparation.
Quick and Convenient
Far too many associations waste time fumbling with financial reports when they could be focusing on maintaining the community and keeping residents satisfied. HOA software largely automates accounting processes, allowing your board to save time. Relying on software is also more convenient since you don’t have to worry about confusing financial terms and calculations. With software, you can generate an HOA balance sheet with the simple click of a button whenever you like.
Easy Access and Storage
Is your homeowners association running out of room to physically file reports? Space is a big issue for many associations, especially with the countless documents and records you need to maintain. With architectural review forms, violation records, and insurance policies to keep, the addition of financial reports can make it extra hard to find room. Plus, there is also the issue of rifling through years and years’ worth of documents when you’re in search of a particular one.
Not with HOA software, though. Because HOA software uses servers to store data (whether in the cloud or on-site), space is a non-issue. If you ever run out of digital space, you can always purchase an upgrade. That’s not as easy to do with physical space.
Management software also lets you search for records in a more efficient manner. Apart from that, you can also make copies of your data and store backups somewhere else. This not only takes care of access but also security and loss issues.
Accuracy and Security
The numbers on a balance sheet don’t just magically appear out of thin air. You record financial transactions in your general ledger, which you then use as a reference when preparing your HOA balance sheet. During this process, though, you can commit mistakes and end up with an inaccurate report — and you already know how dangerous it can be to work under a financial misconception.
HOA software automatically pulls its numbers from financial records to generate reports, thus, minimizing human errors. Of course, since you will still need to manually input invoices and other financial transactions at times, there is still some room for mistakes. Overall, though, HOA software can prepare more accurate balance sheets. In addition to better accuracy, HOA software also helps prevent fraud since it is harder to fake the numbers.
A Helping Hand
The HOA balance sheet is integral for homeowners associations to evaluate their financial state. Thus, it is essential to have an accurate balance sheet that you regularly update. Unfortunately, this is not always achievable when left in the hands of inexperienced board members. An HOA management software, though, can assist with this and with many others.
If your homeowners or condo association needs reliable and comprehensive software, choose Condo Manager. Give us a call today at 800-626-1267 or contact us online for a free demo.
- How Can An HOA Management Software Help Delinquent Accounts
- What Is A Bank Reconciliation? And How Can An HOA Management Software Help With That?
- 4 HOA Financial Reporting Mistakes To Look Out For