Many boards confuse HOA bookkeeping with accounting. While these two may seem similar, they address very different issues. It is important to understand the role of each practice so that the board can hire the right support and keep the association on track.
What is HOA Bookkeeping?
Bookkeeping covers the day-to-day financial activity of an association. A bookkeeper records money that comes in and goes out of the HOA or condominium. They keep the books accurate, up to date, and organized.
There are many ways bookkeeping supports an association’s operations. First of all, it often involves posting dues and assessments. Bookkeeping tracks and records fees, late charges, interest, and collection costs. It posts the payments to the correct owner ledger.
Secondly, bookkeeping helps with vendor payments. A bookkeeper can log invoices, confirm vendor details and invoice dates, and route invoices for approval. They also prepare payments and ensure they go out on time.
Thirdly, bookkeeping supports bank tasks. A bookkeeper can reconcile bank statements, track deposits, and monitor electronic payments. They can also verify if checks have cleared. With bookkeeping, an association can quickly identify suspicious activity.
Finally, bookkeeping makes it easy to answer owner questions. Owners might ask about their balances or payment history, and a ledger can easily clear up those questions.
What is HOA Accounting?
Accounting relies on bookkeeping records to interpret the association’s finances and to support management oversight. It is the practice of turning data into reports and decisions. It often includes financial statements, with an accountant preparing the balance sheet, income statement, and cash flow report.
An accountant can facilitate proper budgeting and forecasting. They can track reserve contributions and spending, conduct audits, and prepare tax filings. Their responsibilities differ from those of a bookkeeper, but a single person can handle both jobs.
HOA Bookkeeping vs HOA Accounting: What’s the Difference?
While bookkeeping and accounting are not one and the same, they do work hand in hand. Their difference primarily rests on the focus and scope of each practice.
Bookkeeping is more about recording, whereas accounting is about the analysis. The former tracks financial transactions, while the latter draws conclusions and insight from those records.
It is important to note that both roles promote transparency within an HOA community. Everyone is involved. Through proper bookkeeping and accounting, board members can ensure accurate records and present data-backed reports to residents.
Homeowners have a right to know how the association is handling funds. Additionally, lenders and insurers want to see organized records. Lastly, vendors want timely payments. Both accounting and HOA bookkeeping help deliver these results.
Do Small HOAs Need Both Bookkeeping and Accounting?
Small associations tend to have fewer, simpler transactions, but that doesn’t mean they can skip either. Both accounting and bookkeeping still play a role in the operations of a small community. Such a community still has to pay bills, collect dues, and manage reserves — all of which demand proper bookkeeping.
Similarly, condo association bookkeeping is integral to condo management. While condos and HOAs differ in structure, they still rely on the same basic principles of financial oversight.
Why Accounting and Bookkeeping Should Work Together
Both bookkeeping and accounting are integral parts of a holistic financial strategy. Accounting without bookkeeping can lead to several problems, and the reverse is also true.
Bookkeeping alone may not catch gaps or discrepancies in an association’s finances. A community can underfund reserves for years but still have a balanced account. Proper accounting enables quick identification of problem areas before they worsen.
Associations also have numerous financial compliance requirements. Tax filing is a prime example. Without both HOA bookkeeping and accounting, the board can’t properly organize and file its taxes.
Furthermore, the lack of bookkeeping can result in unreliable financial statements. Even with a competent CPA on hand to create these reports, the absence of accurate records will stop them in their tracks. A CPA can’t come up with the numbers out of thin air, and messy data can’t produce clean reports.
An association with poor bookkeeping records should also be expected to lead to higher audit costs. If the data is harder to organize and sift through, auditors need more time and, in turn, charge a heftier price.
Who Should Handle HOA Bookkeeping and Accounting?
There are three parties that can handle accounting and bookkeeping: board members, accountants, and HOA management companies. Let’s discuss each option below.
Self-Managed Boards
Self-management offers board members greater control, but it also requires a hands-on approach to financial management. Small communities may operate fine without professional help, due to their size and simple transactions, but the job requires experience.
To ensure the best results, boards must practice discipline. They must follow a consistent process and have secure banking practices. It is also a good idea to spread control rather than leaving it to a single person. If only the treasurer collects dues, pays bills, and reconciles accounts, there is ample room for error or misconduct.
Another struggle with self-management is continuity planning. Board members don’t stay the same forever. New directors are elected every year, and knowledge can get lost in between transitions. Make sure to have a written policy to ensure practices continue.
Hiring a Bookkeeper or Accountant
The HOA board can hire a dedicated bookkeeper or accountant. This option provides greater consistency and expertise. Professionals are better equipped for the job.
That said, it is important for the board to maintain control. Start by defining the scope of the bookkeeper or accountant. Set expectations early on to avoid confusion later.
Approvals are also necessary. Payments and disbursements should go through the proper channels. Giving the bookkeeper or accountant free rein on the association’s finances can create problems down the road.
Using an HOA Management Company
Many communities rely on HOA management companies instead. A good company can provide bookkeeping and accounting services as part of a full package. Some even offer these solutions à la carte.
Management companies take on most of the board’s daily tasks. These include processing payments, collecting fees, planning reserves, budgeting, and preparing financial reports. Many also file taxes for their clients.
Of course, as with any third-party service, boards should still maintain oversight. Management companies should not have complete control over the association’s finances. Board members must review reports regularly, ask clarifying questions, and implement internal controls.
A Working Tandem
Most communities benefit from both HOA bookkeeping and accounting. Bookkeeping keeps records accurate and up to date, while accounting turns those records into clear reporting and smart planning. Every board should invest in both functions and seek professional help when necessary.
Graham Management offers exceptional HOA financial management services to Houston communities. Call us today at (713) 334-8000, request a proposal, or contact us online to learn more!
RELATED ARTICLES:
- Texas HOA Reserve Study: Requirements, Laws, And Best Practices
- How To Create And Manage An HOA Budget As A Board Member
- A Guide To HOA Special Assessment In Texas