Homeowners Association, generally speaking is a nonprofit organization, created a little under the laws of the state. The HOA has an obligation to the membership to maintain accounting that is accessible and understandable by a non-accounting person but also handled in accordance with title case generally accepted accounting principles and title case (GAAP).
Opinions vary on the type of accounting system used, but one thing is consistent, this is fund accounting. We have found that the most functional methodology is modified accrual. Association finances are not overly complicated. There are no tables, accruals, depreciation, ledgers of assets for tax purposes.
Association budgets have to balance. There are no federal bailouts, no source of money to borrow. No adjusting income or expenses midyear, (generally speaking) the association board has to make careful decisions and thoughtful predictions in order to achieve the balance. Of course, with a balanced budget there must be two sides to the equation.
Association income is primarily derived from homeowners assessments. There maybe other income sources but they are typically minor and could include such things as amenity rentals, late fees and fines for noncompliance with the community rules. (Read all about that in another blog post)
Quick and simply, association assessments equal the cost to operate the association.
The cost to operate and association can be broken down into a few categories, all of which are readily understandable. Electricity and water for street lighting and amenities, postage and administration,repairs and maintenance, taxes and insurance. These are itemized in a table, going over carefully to ensure favorable arrangements and weighed against community requirements, needs and desires.
To these expenses, the association needs to add to general considerations, and allocation for bad debt, and an allocation for reserves.
For most communities the math is just about that straightforward, the bottom line is assessed to unit owners in proportion to their ownership interest in the community. The board then works with their manager to carefully operate the association and ensure that the association does not run out of money before it runs out of year!