How to Set Up Your HOA Bookkeeping System

When it comes to running a successful HOA financial operation, a solid bookkeeping system is arguably the most important aspect to get right. Proper bookkeeping makes every other aspect of financial management easier. In this post, we’ll walk through the four key elements to consider when setting up an effective bookkeeping system for your HOA: 

1. Accounting Method

2. Chart of Accounts

3. Recording Transactions

4. Month-End Close Process

   
   
   
   

Accounting Method

The first decision you’ll need to make is which accounting method to use: Cash Basis or Accrual Basis. Each method has its pros and cons, and choosing the right one for HOA will have a big impact on everything related to your HOA finances, from time and effort required to the reporting and budgeting. 

Cash Basis Accounting 

Cash basis accounting is the simpler of the two methods. It records revenue and expenses when cash is actually received or paid out. While this method is straightforward, it is not the most accurate. 

For example, if you’ve received an invoice for a service but haven’t paid it yet, it won’t show up in your financial records until the payment is made. This can give a misleading impression of your HOA’s financial health, as outstanding liabilities or unpaid invoices are not reflected in the statements, which could make the HOA's financial position appear stronger than it truly is.

Accrual Basis Accounting

With Accrual Basis Accounting, revenue and expenses are recorded when they’re earned or incurred—regardless of when the cash is received or paid. This method provides a more accurate picture of the HOA’s finances because it accounts for all payables and assessments due even if the money hasn’t changed hands yet. 

While the accrual basis is more complex and requires more expertise to implement, it gives a clearer view of your HOA’s financial health, making it the best choice for most communities. 

Modified Cash Basis Accounting 

A third (bonus) approach is Cash Basis Accounting, which combines elements of the cash and accrual methods. It uses cash basis for most transactions but accrual basis to record long-term assets and liabilities. This is particularly important for tracking depreciation in long-term assets the community might own and debt balances on any loans the HOA has outstanding. 

Bottom Line?

While some small HOAs might consider using cash basis or the modified cash basis, we generally recommend Accrual Basis for the majority of communities. Not only does it provide a more accurate financial picture, it’s also compliant with Generally Accepted Accounting Principles (GAAP) and is even legally required by some states. 

Chart of Accounts

Once you've chosen your accounting method, the next step is setting up your Chart of Accounts (COA). This is a complete list of all the accounts your HOA will use to track financial transactions. A well-organized COA is essential because it ensures all transactions are recorded accurately and efficiently, helping you track financial health and making reporting much easier.

Key Categories in Your Chart of Account

The chart of accounts is usually divided into the five major categories below with several subcategories in each.

1. Assets: what your HOA owns—cash, accounts receivable, property, and equipment.

2. Liabilities: what your HOA owes—accounts payable, loans, accrued expenses. 

3. Equity: for HOAs, this is typically just retained earnings, which represents the surplus of income over expenses.

4. Revenue: Money your HOA receives from residents, such as dues and special assessments

5. Expenses: Money spent on things like repair, maintenance, utilities, and legal fees.  

Why a Well-Structured Chart of Accounts is Important 

A well-structured COA provides several benefits:

1. Organized Financial Reporting: Ensures your financial data is categorized correctly, which leads to clear and reliable financial statements.

2. Efficient Financial Management: Helps the board easily track and manage income, expenses, and cash flow.

3. Compliance: A solid COA helps ensure you meet legal and tax reporting requirements.

4. Effective Budgeting and Forecasting: With a clear COA, the board can more easily identify trends, perform analysis, quickly assess financial health, and create more accurate forecasts. 

Recording Transactions

Now that you have your accounting method and COA in place, it’s time to start recording transactions. This is where the actual bookkeeping happens. Here are two recommendations to make sure your HOA maintains accurate records and stays up to date on financial transactions. 

Keep Transaction Documentation

For every transaction, it’s important to keep supporting documentation, such as invoices, receipts, contracts, and any other relevant records. Using modern bookkeeping software makes this easy, as you can attach digital files to each transaction. This helps ensure that all supporting documents are linked to the corresponding transactions and can be referenced quickly if needed.

Good record-keeping is crucial for tax filing, compliance, and passing audits. By saving and organizing your documents, you’ll avoid headaches come tax time or in the event of an audit.

Stick to a Consistent Schedule

To avoid falling behind, set a regular schedule for entering transactions. Depending on the size of your HOA, you should aim to update your records at least weekly or biweekly. Keeping things current ensures that you’re always prepared for the month-end close process and avoids scrambling to catch up at the end of the month. 

Month-end Close Process

The month-end close process ensures that your HOA’s financial records are accurate and up to date. It involves reviewing all transactions for the month, reconciling accounts, and preparing financial statements.

Here are the key steps in the month-end close process:

1. Reconcile Bank Accounts: Make sure that the HOAs bank statements match the cash balances in the general ledger. If there are discrepancies, investigate and resolve them. 

2. Verify Accounts Receivable: Confirm that all payments made by residents have been properly applied to their accounts. Address any overdue or delinquent balances.  

3. Verify Accounts Payable: Review the accounts payable ledger to ensure all outstanding bills and payments made are properly recorded. Address any overdue payments. 

4. Post Month-end Journal Entries: You may have some non-cash monthly journal entries that need to be made, such as accrued expenses or non-cash events like depreciation or amortization.

5. Review the Financial Statements: Review the 3 main financial statements (Balance Sheet, Income Statement, Cash Flow Statement). Compare to prior periods and look for any significant trends or changes. 

6. Close the Books: After everything is posted, reconciled, and reviewed, you can officially close the books for the month. This final step ensures no further changes can be made to the general ledger for that period, which helps protect against errors. 

Why Month-End Close Matters

A thorough month-end close process is essential to maintaining accurate financial records. Without it, errors can slip through the cracks, leading to incorrect financial reporting and potential compliance issues. 

Conclusion

Accurate and timely bookkeeping is critical to ensure the financial health and stability of your HOA. By choosing the right accounting method, organizing your Chart of Accounts, recording transactions correctly, and following a structured month-end close process, your HOA is well positioned to stay on track financially.

Though bookkeeping may seem like a task of simple data entry, the setup process—such as selecting an accounting method and structuring your COA—is what truly differentiates a professional system from an amateur one. 

If you need help building your HOA’s bookkeeping system, reach out to us today!