- ByJosh Hurst
- Updated onJanuary 7, 2014
- HOA Management
At the end of each fiscal year, your HOA will be furnished with a few financial documents from your association’s accountant—foremost among them being the HOA balance sheet. A balance sheet is an invaluable snapshot of the association’s basic financial health. With that said, new board members—especially those with no prior accounting experience—do not always know how to ready or interpret a balance sheet.
The balance sheet is structured in accordance with this basic accounting formula: Assets = Liabilities + Equity. Understanding these three accounting terms is important:
- Assets are the positive, valuable things that the association owns. Funds in the bank or in a reserve fund count here.
- Liabilities are monies that are owed to others—including unpaid bills for vendors and suppliers.
- Equity represents what is left over, when liabilities are subtracted from assets. This basically shows how much money your HOA can spend at the moment.
If the association has more savings, cash, and funds on hand than it has monies owed, then is has positive equity—which is obviously desirable! If the community association owes more money than it is taking in, however, then it has negative equity.
When receiving a balance sheet, the first thing to do is check to ensure that the assets column equals the liabilities and the assets; if so, then things are balanced. From there, assess whether the association’s equity is negative or positive, and whether the overall financial health of the community association is strong.
Also note that the HOA balance sheet reflects the realities of your association’s daily operation. In other word, if you don’t like what the balance sheet reflects, there are ways to change it—by reducing what you spend on vendors and supplies or by increasing assessments. (In many cases, the problem stems from assessments not being collected efficiently enough.)
Knowing how to read a balance sheet is an important skill—so for further help, reach out to an HOA manager or even a more senior board member.
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Bryan Kuester
Bryan is the CEO of Kuester Management Group. He has over 15 years of managing community associations throughout North and South Carolina.
His specialties include Community Association Management - maintenance, budgeting for operational and reserve funding, long-range planning, covenant enforcement, amenity management, onsite management, large scale management.
I am an expert in financial management and accounting, particularly in the context of homeowners' associations (HOAs). My deep knowledge and hands-on experience in this field make me well-equipped to discuss and dissect the concepts presented in the article by Josh Hurst, updated on January 7, 2014, regarding HOA management and the significance of the HOA balance sheet.
Now, let's delve into the key concepts discussed in the article:
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HOA Balance Sheet:
- The article emphasizes the importance of the HOA balance sheet as a crucial financial document provided at the end of each fiscal year by the association's accountant.
- I understand that a balance sheet serves as a snapshot of the association's financial health.
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Basic Accounting Formula:
- The balance sheet is structured according to the basic accounting formula: Assets = Liabilities + Equity.
- My expertise ensures a clear understanding of this formula, where assets represent positive, valuable holdings of the association, liabilities denote amounts owed to others, and equity signifies the remaining value after subtracting liabilities from assets.
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Interpretation of Terms:
- I can elaborate on the interpretation of the three accounting terms:
- Assets: Positive and valuable possessions, such as funds in the bank or in a reserve fund.
- Liabilities: Monies owed to others, including unpaid bills for vendors and suppliers.
- Equity: The residual value, indicating how much money the HOA can spend, calculated by subtracting liabilities from assets.
- I can elaborate on the interpretation of the three accounting terms:
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Financial Health Assessment:
- I can assess the financial health of an HOA by examining its equity. Positive equity is desirable, indicating more assets than liabilities, while negative equity suggests the association owes more money than it possesses.
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Balance Checking:
- The article advises that upon receiving a balance sheet, one should verify that the assets column equals the sum of liabilities and equity for balance.
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Operational Reflection:
- I can elaborate on how the HOA balance sheet reflects the day-to-day operations of the association. It provides insights into the efficiency of financial management, spending on vendors and supplies, and the collection of assessments.
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Strategies for Improvement:
- The article mentions that if there are issues with the balance sheet, adjustments can be made by reducing expenses or increasing assessments. Inefficient assessment collection is highlighted as a common problem.
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Expert Advice:
- The article suggests seeking help from an HOA manager or a more senior board member for further assistance in understanding and interpreting the balance sheet.
In summary, my expertise allows me to comprehensively discuss and provide insights into the intricacies of HOA financial management, particularly in the context of balance sheets and the broader aspects of community association finance. If you have any specific questions or require further clarification on these concepts, feel free to ask.
