A Balance Sheet is a snapshot of an Association’s finances. However, new Board members often don’t know what to look for when reviewing the Balance Sheet included in the financial packet they receive from their management company every month.
This guide provides some gereral accounting terms, details about differences in equity, and examines the desired balance for a Balance Sheet.
Familiarize Some Basic Accounting Terminology
“Assets” are the positives of a business. It’s the cash in a business’s bank accounts and all of its investments, including the checking/operating account, reserve account, and any investments such as certificates of deposit.
“Liabilities” are the negatives of a business–monies that a business owes. Liabilities include any funds that are due payment to other people (unpaid bills), money that owners have paid that are not yet owed (prepaid assessments), and other expenses.
“Equity” is kind of a paper concept–it is not a representation of how much cash a business has, or how much it can spend. It is a term of art used to represent the monetary value of the business. It might be represented on the balance sheet as retained earnings or losses, or as a current year income or loss.
Understanding the Difference Between Positive versus Negative Equity
If a community association has more savings, cash, and funds that it may collect than it has money to pay, it has a positive equity. On the other hand if a community association owes more money than it has and can take in, it has negative equity.
The Balance Sheet Should Reflect Positive Equity and Should Balance
When looking at a Balance Sheet, first make sure that the Assets are equal to the Liabilities and Equity. If they are, the finances are balanced.
Next, check to see that the business has Positive Equity or Retained Earnings. A board should not be spending more than it is receiving in income–so if liabilities are greater than assets, the business should consider increasing the dues or levying a special assessment so it doesn’t deplete its reserves. If you see negative equity on the Balance Sheet, discuss it with your property manager. Find out if any expenses are more than the income and determine what action, if any, is best for the HOA or Condo Association.
The financial statement of a board packet shouldn’t be glazed over. At the very least, using this guide when reading a Balance Sheet will provide perspective regarding the financial condition of a neighborhood.
Provided by Atlanta HOA Management