Balance sheets are used by all types of businesses. HOAs also use balance sheets to understand how much money is coming in, how much is going out, and how much equity they have.
This financial document provides a clear snapshot of the company’s finances at any given point in time. The items listed on the balance sheet are pulled from the general ledger. You can see what a balance sheet looks like by downloading our free template.
Download our free balance sheet template
An HOA balance sheet reflects the day-to-day operations of the community. Board members must first understand balance sheets to understand the financial state of the association. If the HOA is overspending, balance sheets can help the board catch this problem early on. That’s one good reason why HOAs should prepare monthly balance sheets.
No room for error when it comes to HOA finances
Even though HOAs are non-profit organizations, they still need to generate revenue to pay for expenses. The HOA board has an obligation to maintain the association’s assets and manage its finances to the best of its abilities. While it’s usually up to the treasurer to prepare financial statements, all board members are strongly encouraged to take a hands-on approach when it comes to documenting and assessing finances. Good or bad, board members need to know what the numbers say so they can make adjustments as needed. This could include looking for new vendors, increasing monthly dues, hiring a property manager, etc.
While we can all appreciate that board members are volunteers, they must take a serious approach to finances. Poor financial management decisions and mistakes can lead to a number of negative consequences for the association. For example, if spending isn’t carefully tracked or the reserve fund is too low, the association may end up levying a special assessment or taking out a loan to cover future costs.
Conversely, when an HOA is in good financial standing:
- Bills are paid on time,
- Preventative maintenance is completed for when it’s scheduled, and
- Association properties maintain their value and appeal.
Three parts to a balance sheet
A balance sheet is composed of three categories: assets, liabilities, and equity. When tallied, the total assets should be equal to the total liabilities and owner’s equity:
Assets = Liabilities + Owners Equity
This is why it’s called a balance sheet – the report should be balanced if the money coming in and money going out was properly tracked.
Assets
Assets are the items that add to the HOA’s revenue stream. Assets may be divided into two major categories: current (short-term) and non-current (long-term) assets.
Current assets are liquid; they can easily be converted into cash. Some examples of current or liquid assets include:
- Cash in the association’s bank account
- Petty cash
- Reserve funds
- Accounts/assessments receivable
- Prepaid insurance
Conversely, non-current assets cannot be converted to cash very quickly. Examples of non-liquid assets include:
- Land
- Property, plant, and equipment
- Long-term investments
Liabilities
Liabilities are amounts owed by the HOA to other people and companies. Anything that costs money is considered a liability. Like assets, liabilities can be divided into current and non-current liabilities.
Current liabilities are amounts due within the calendar year. Current liabilities may include:
- Accounts payable
- Rental fees
- Utilities
- Staff wages
- Prepaid assessments
- Temporary loans
- Interest
Long-term liabilities are amounts due after the calendar year. They may include things like:
- Deferred revenue
- Long-term loans
- Long-term lease obligations
Equity
Equity is essentially the residual interest in the assets after all of the liabilities have been deducted. In other words, it is the value left after subtracting all of the liabilities from the assets.
If the equity of your HOA is positive, that means your association is doing well and is bringing in more revenue than the money it owes. If the equity is negative, that’s a big warning that the association needs to do something right away to improve its finances. Overspending is never a positive thing.
How much equity should an HOA have?
There is no “one-size-fits-all” equity amount for HOAs, but generally speaking, the larger the HOA, the larger the amount should be.
Associations can calculate their equity ratio by taking the total equity number, and dividing it by the total assets.
Equity Ratio = Equity / Assets
An HOA that has an equity ratio of 10% to 20% is doing well. However, it may not be possible to acquire this much. If you’re uncertain about how much equity the HOA should have, arrange to speak with a professional who has experience in this area.
Do balance sheets have to be prepared every month?
As with most financial statements, the more often balance sheets are created, the more insight they will offer to the board. While they do not have to be produced every month, it’s a good idea to have a monthly balance sheet prepared. This way, small issues can be addressed before they turn into bigger problems. The more information your board has to work with, the more effectively they can manage the community.
That being said, it may be acceptable to release balance sheets every quarter or on an annual basis. But, it becomes more difficult to find mistakes or significant points when these documents are only produced once a year.
Keep in mind that owners have the right to see the balance sheet too (at a minimum, they should have the right to review the HOA budget, income and expense statement, and a statement of their personal account). Some states may also have their own rules about how and when balance sheets must be distributed.
Balance sheets are easier to manage if the document sticks to using the same format and the same categories every time. It never hurts to hire a CPA—or ask your property manager—to help you create a reliable and effective balance sheet.
Conclusion
Balance sheets provide a snapshot of the HOA’s finances. They use information from the general ledger to show how much money the association is bringing in and how much is going out.
Accuracy is key when preparing financial statements; just one small typo could distort an entire financial report. This could lead to the misconception that the HOA has more assets or fewer debts than it really does.
If the board is unsure about how to make a balance sheet—or has some questions about its finances—it is strongly encouraged to seek help from an accounting firm, CPA, or a financial management company. When it comes to HOA money, it’s not worth it to take risks or wait and see what happens.