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FINANCIAL REPORTING REQUIREMENTS
April 1, 2001
In order to keep track of an Association’s finances, it is
extremely important to understand how and why a financial
report is compiled. Board Members should become familiar
with the basics of what makes up a good financial report
and how an Income Statement and Balance Sheet is compiled.
We will summarize a typical financial statement and how you
can better understand this critical area of your
Association’s operation.
A financial statement reflects the financial condition of
the Association for a certain period of time (Monthly,
Quarterly or Annually. The Income Statement and Balance
Sheet expresses the financial condition of an Association.
The Income Statement will detail the income and expense
activity for that period of reporting time and it will also
show the cumulative activity for the year-to-date. This
report will detail the income and expense activity against
the budgets. The bottom line will show the Net Surplus or
(Loss) for the period and for the year-to-date. The Balance
Sheet will detail the Association’s Assets, Liabilities and
Capital (Equity). In all cases, the Assets will equal
Liabilities and Capital. In order to prepare an Income
Statement and a Balance Sheet, the following procedures are
followed in the accounting cycle. 1. Business transactions
are made daily in the Association’s accounts. 2. The
transactions are entered in the Association’s books in the
General Journal. 3. The information in the General Journal
is posted to a record called the Ledger. 4. A trial
balance is prepared to verify balances in the Ledger. If
required, the trial balance is adjusted to correct the
account balances. 5. The adjusted information is then used
to prepare an Income Statement and Balance Sheet.
A proper Financial Statement will have the following
details to substantiate and back up the Income Statement
and Balance Sheet.
GENERAL LEDGER - This will detail daily transactions that
have been posted for each account in the books and it will
correspond to the Income Statement format. It will show the
account code number, the account name, date of the
transaction, and a brief description of the transaction,
whether the transaction was a debit or a credit and,
finally, where the transaction was posted as a journal
entry. GENERAL JOURNAL - This will show any business
transactions not recorded in any journals and will again
show on the General Ledger. Included in this report will be
the date, the amount, the debited account, the credited
account, the type of entry and a brief description of the
activity. ACCOUNTS RECEIVABLE DETAIL - This report details
who owes maintenance assessments, late fees and penalties,
if any. Prepaid maintenance for an individual would be
reflected in this section as well. ACCOUNTS PAYABLE DETAIL
- This would show any outstanding bills for goods and/or
services known at the time of the close of the reporting
period, owed but not paid. TRIAL BALANCE - This is a
procedure whereby all of the balances of the accounts of
the Association are determined. The Trial Balance will then
take each individual account as they are listed as a debit
or credit. The total of the Debits will equal the total of
the Credits. After all accounts are in balance or any
corrections have been made, the Balance Sheet and Income
Statement can now be prepared accurately. BALANCE SHEET - A
Balance Sheet is provides a summary of the financial
condition of the Association as of a certain date. It
contains the following elements: ASSETS - The Assets
portion of the balance sheet will detail the “Current
Assets” including all cash balances in the operating
account, savings for reserve funds, working capital savings
and petty cash. In addition, it will show if any “Other
Assets” such as maintenance that are billed but not
received, utility deposits, prepaid deposits, prepaid
insurance and prepaid expenses. LIABILITIES AND CAPITAL -
The Assets of the Association will always balance or equal
the Liabilities and Capital of the Association. Items that
are considered liabilities would be accounts payable (all
unpaid bills that are known), prepaid maintenance
assessments collected, any payroll taxes, which were
unpaid, and any other debts. The difference between the
Assets and Liabilities for that reporting period is the
Capital or Equity of the Association. Another way to think
of it is to imagine this as the Association’s net worth.
The Equity or Capital will vary from reporting period to
reporting period based on the amount of cash on hand,
prepaid expenses, prepaid maintenance, maintenance
receivables and the amount of net income/loss. INCOME
STATEMENT - This report will detail in terms of Income and
Expense, changes in the financial condition of the
Association over a specified period of time. A good Income
Statement will show actual income and expense activity for
that period of time (Monthly) and for year-to-date
calculations. This report will also detail current budgets
for the month and for year-to-date as well. Variances will
occur when actual income taken is more than what was
budgeted. This will be shown as (-). Also, the income
Statement will report the Net Surplus (Profit) or Loss for
that period and for the year-to-date. The Surplus or Loss
for the period will be added or subtracted from the proper
reporting period’s Fund Equity.
Management of any Association includes management,
operations and fiscal management. Boards of Directors,
Owners and Managers need to know and understand good
accounting practices in order to manage and operate their
Association effectively.
Copyright 2007© Associated Property Management of the Palm Beaches, Inc.
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