What Makes Community Association Accounting Unique?
We’ve spoken in the past about the differences between industry specific software such as TOPS vs generic ‘off-the-shelf’ software products. Today, I wanted to highlight one of the differences specific to community association accounting functions – how community association (CAM) Accounting uniquely differs from standard business accounting. Enjoy!
If you’ve learned how to balance your personal checkbook, you have a basic understanding of accounting principles. The average company operates on a form of accounting called Goods and Services accounting, which basically means tracking incoming monies (credits) and outgoing monies (debits) and calculating the difference (profit). Sure there are many more complexities that factor into business accounting, but those are the basics. So why would you need a specialty software to track for Community Associations accounting? Accounting is Accounting, right? Wrong.
The Wrong Accounting Model
In basic business accounting, one of the first things you learn is not to count your chickens before they’ve hatched.
In other words, revenue does not exist until you have sold an item or service, and the money is in your account. Although budgets exist in goods and services accounting, they are more of a guideline, or a snapshot of the past to help keep companies on target for reaching profitability goals, rather than a holy document etched in stone.
The key to a community association with solid financials is a great budget.
However, in CAM accounting, prediction is the name of the game – nearly everything that is done, from contracts with vendors to management fees to maintenance of amenities to collections processing for delinquent owners is strictly budgeted in.
In fact, goods and services is a poor accounting model with which to compare. CAM accounting works more like a combination of small government (predictable tax revenue) and a non-profit organization (what comes in must go out).
Similarities to Small Government Accounting
Like a small government, a community association is funded by the very homeowners who live in the community.
Once development on a community is complete, there are a finite number of sources from which the money can be made. One cannot sell more homes than the community has to offer. That makes the amount of money the association can collect from homeowners in assessments (or dues) predictable in the sense that you know exactly how much you can expect to receive.
Of course, not all homes may be occupied all of the time, but every home has an owner, even if that owner is a bank or a developer, even if the homeowner is in arrears. CAM Accounting is sometimes referred to as Balance Forward Accounting due to the automated process of ‘carrying forward’ an owner’s balance from month to month, tacking on the monthly assessment amount to the balance owed each month, and applying any payments received to the entire amount, rather than invoicing for a specific purchase as in Goods and Services accounting.
This predictability allows associations to be able to project a very good estimate of the amount of money the association will draw in a given year. This projection is, of course, the foundation of the budget.
Similarities to Non-profit Accounting
Because no homeowner wants to pay more than they absolutely have to, community associations tend to run very strict budgets, where every single dollar going in and coming out is specifically earmarked in the budget.
In this sense, CAM Accounting begins to seem more like a non-profit organization.
In a charity, for example, any money not used for operating expenses must go out to perform the charitable service. The goal at the end of the fiscal year is to have a zero balance, where every cent that has come in to the organization has gone back out again.
Following this example in community associations, the ‘charity’ is the reserve fund – the community’s savings that will be used for major, community-wide expenses such as roof repairs and balcony replacements. If not enough money is dedicated to savings in the reserve fund, the community may have to charge homeowners a lump sum to pay for an emergency. These “Special Assessments” do not make for happy homeowners, trust me!
So the primary difference between CAM Accounting and Goods and Services Accounting is this prediction process in which the community association does, in fact, count their chickens before they hatch, or at least attempts to make an accurate prediction.
Finding a Balance
CAM Accounting consists of a strong budget with proper allocation of all funds so that every cent is accounted for, where owners are not over-charged, but also large scale repairs and community-wide emergencies are prepared for financially. The trick is in finding that perfect balance, and in maintaining it year after year! But that’s a topic for another day…
Terminologies used in this article:
- Balance Forward Accounting (CAM Accounting) – In Balance Forward Accounting, assessment amounts are automatically accumulated each period, and are automatically added to the full amount owed (unpaid amounts are carried over from period to period). Any payments made are applied to that balance. Be sure to check with your lawyer, or local professional organization – some states have regulations on what can or cannot be carried forward. Monthly assessments are nearly always carried forward, but fines for violations, legal fees, special assessments and collection costs may not be allowed to be forwarded in your state.
- Goods & Services Accounting (Business Accounting) – You’ll find definitions that run the gamut on the Internet, but in the context of this article, we are specifically referring to accounting processes that charge for items sold or services rendered. Each individual transaction has a separate payment history and procedure. Money is not counted as profit until payment has been received.
- Debits – An entry in the financial books of a community that increases an asset or an expense or an entry that decreases a liability, owner’s equity, reserves, or income.
- Credits – An entry in the financial books of a community that increases a liability, owner’s equity, reserves or revenue, or an entry that decreases an asset or an expense.
- Budget – A document which is used to estimate a community association’s income and expenses.
- Assessments (Regular Assessments) – Regular fees levied against owners and used for the operation and maintenance of the association.
- Delinquent Owner – A home or unit owner (equivalent to a ‘customer’ in goods and services accounting) who is delinquent in the payment of the regular assessments.
- Special Assessments – A fee proportionately charged to homeowners in a community association to cover the costs of improvements that will be for the benefit of the entire community.
- Reserve Fund (Capital Reserve Fund) – A reserve of money set aside in a separate account and earmarked for funding of long term community maintenance projects and emergencies. Typically, a reserve study is performed to calculate the reserves needed and determine a percentage of regular assessments that must be set aside. Many communities earmark between 20% and 25% of regular dues for the reserve fund. Reserves are independent of the association’s operating accounts.
Disclaimer: This article provides a basic overview of some of the principals of community association accounting, but may not cover every aspect you’ll need to consider for your organization’s special needs and your specific state laws. For a complete understanding, we recommend you connect with your local CAI chapter and inquire about available classes.
Download a FREE eBook “CAM Accounting 101”!
In this download, this eBook helps provide a basic understanding of the unique aspects of Community Association Accounting, and gives a general overview of standard CAM accounting practices.
Here’s what you’ll learn:
- Provide Board members with the monthly financial reports they need to govern their association
- Which accounting method to use for your association management.
- Understand the accounting cycle for community management
- Identify the unique aspects of CAM accounting.
- How to set up your General Ledger.
This is the resource you’ve been waiting for.