Homeowners and Management Personnel Must Understand Their Association’s Finances

Managing and understanding the finances of a homeowners’ association is one of the most important responsibilities of the association’s board of directors. Understanding the association’s finances is also an important responsibility of those who own properties that are part of a homeowners’ association.

Association finances are managed through the regular preparation and use of financial statements. Financial statements provide insight for financial planning and promoting transparency between an association’s board and its owners. They are also required by law and an association’s governing documents. The components of the financial statements and the frequency of their preparation may vary depending on state laws and an association’s governing documents.

A financial statement is an official record that details all the financial activities of the association. The typical components of an association’s financial statement consist of:

• Balance Sheet
• Statement of Income
• Statement of Receivables
• Bank Statements
• General Ledger
• Reserve Fund Balances

Balance Sheet.

The balance sheet reflects the financial strength of the association. There are three parts to a balance sheet: (1) a statement of assets; (2) a statement of liabilities; and (3) equity.

Association balance sheets, whether prepared monthly, quarterly or annually, are a good representation of an association’s operations and the more frequently balance sheets are prepared, the more insight they can provide into the financial workings of a community association.

Statement of Income.

The statement of income shows financial information over a period of time- typically, monthly, quarterly, or annually. It is often viewed as the most important document within the financial statement because: