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The financial management of community associations comes with its own set of challenges, especially when it comes to accounting. Should a community association be run as a business? A nonprofit? A small government? The answer is, “yes and no.” Community associations function as a bit of all the above.
In some ways, a community association is a business. Community associations need a solid budget, organized financials, and good recordkeeping. But there is one major difference. Unlike business accounting, where you count revenue after an item or service is sold, community associations must predict revenue before any money is collected. Dues, management fees, vendor contracts, maintenance, amenities, and even collections for delinquent owners must be included in the budget.
What do community associations and nonprofits have in common? Like nonprofits, community associations must have very strict, precise budgets, with all expenditures carefully earmarked and the goal of a zero balance.
For example, a community association’s reserve fund must be used for specific expenses, such as new railing or roof repairs, and must be designated for those items. Otherwise, homeowners will be required to pay a lump sum for all expenses not included in the reserve fund.
Small Government Accounting
It may seem strange to compare a community association to a small government, but there are some similarities in the way the association is funded. Like a government, funding is provided by the homeowners who live in a community. This provides a certain amount of predictability about dues or assessments that will be collected, which is essential for the association’s accounting. This type of accounting is also known as Balance Forward Accounting because owners’ balances are carried forward each month even if a home is not occupied at the time.
Due to the uniqueness of community associations’ structure, it’s vital to have an accountant who is familiar with the industry. At Cavanaugh & Co, we have served hundreds of association clients throughout the west coast of Florida for more than 40 years. Our partners were at the forefront of the accounting profession during the development of accounting rules for associations and continue to serve their peers to raise the bar for all professionals. We understand the industry and we provide solutions.