Cash vs. Accrual Accounting for Your Atlanta Condominium Association
Atlanta, Georgia.–The cash method and the accrual method of accounting (sometimes called cash basis and accrual basis) are the two principal methods of keeping track of a condominium association’s income and expenses throughout Atlanta and North Georgia. In most cases, condominium boards have the option of choosing which method to use, but some condominiums actually have this outlined within their documents. As a board member, it is important to understand how each of these accounting systems work and how they affect the financial statements of your Atlanta condominium association.
In a nutshell, these methods differ only in the timing of when transactions, including income and expenses, are credited or debited to your accounts. Here’s how each works:
The accrual method of accounting. Under the accrual method of accounting, assessments are recorded as revenue during the period in which the services occur, regardless of when the money for those services (receivables) is actually received or paid. In other words, income is counted when your Atlanta condominium association “realizes” a portion of the assessment for a specific period of time. Also with accrual accounting, expenses are recorded once the service for those expenses is performed regardless of when the bill for the services is received.
Example for Income: Your Atlanta condominium association bills the membership monthly at a rate of $240 per member. In accrual accounting, if a condominium owner pays $1,440 in January, representing the first six month’s of assessments, the condominium association would only record one month’s worth of assessments, which in this case would be $240. The revenue for the remaining $1,200 must be distributed over the next five months of the year.
The cash method of accounting. Many condominium associations and Atlanta area property management companies utilize the cash method because it is easier for board members to understand and is the method most commonly used by small businesses. Under the cash method of accounting, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid.
Example for Income: Your Atlanta condominium association bills its members monthly at a rate of $240 per owner. In cash accounting, if a condominium owner pays $1,440 in January, representing the first six months of dues, your Atlanta condominium association would record the $1,440 as revenue in that month.
Example for Expenses: Your Atlanta condominium association contracts a landscaper to perform some landscape design at the front entrance of the condominium for the amount of $5,000. The work is performed in November but due to budgeting issues, the landscape company is not paid until January. With cash based accounting, the work for the landscape design would appear as an expense in January as this was the month the contractor was paid.
Determining the Transaction Date for Accrual Accounting
With the accrual method of accounting, the most effective way of determining when the revenue is generated or an expense is incurred is by examining the transaction or completion date.
When to record income in accrual accounting. Not until your condominium association performs its service, or in this case, provides each month of services to the owner, do you record the income in your books.
When to record an expense in accrual accounting. Similarly, your Atlanta condominium association would not record an item as an expense until the service is completed or all goods have been received and installed, if necessary. (If a job is mostly completed but will take another 30 days to add the finishing touches, technically it doesn’t go on your books until the 30 days pass.)
Advantages and disadvantages of the accrual method of accounting. While the accrual method of accounting shows the ebb and flow of your Atlanta condominium association’s income and debts more accurately, it may leave you questioning what cash reserves are available, which could result in a serious cash flow problem. For instance, your Atlanta condominium association’s income ledger may show thousands of dollars in assessment revenues owed to the condominium association, while in reality your bank account may be in serious jeopardy of a high percentage of delinquent owners. This is why it is essential to have a professional Atlanta condominium property management company to effectively manage your financials.
Advantages and disadvantages of the cash method of accounting. Although the cash method of accounting provides a more accurate picture of how much actual cash your Atlanta condominium association has, it may offer a misleading picture of longer-term stability. Under the cash method of accounting, for instance, your financial statements may reflect a substantial gain one month when actual assessment cash flow has been slow and, by coincidence, a lot of past due condominium owners paid their balances in that month.
To have a firm and true understanding of your association’s finances, you need more than just a collection of monthly totals; you need to understand what your numbers mean and how to use them to answer specific financial questions.
Riverside Property Management is a Homeowners and Condominium Association management company management company proudly serving Roswell, Alpharetta, Buckhead, Marietta and all of North Georgia. Riverside is also an expert Georgia association management company and high rise Atlanta association management company. To find out more about Riverside Property Management and why it is one of Georgia’s fastest growing property management companies, go to www.riversidepropertymgt.com. You’ll be glad you did.