Cash vs Accrual vs Modified Accrual Methods 101 – Article from the David Stirling Act

Here is a great article from the David Stirling Act about the accounting methods we use wtihin our industry.

Enjoy 🙂

Accounting Methods

 Financial statements vary greatly depending on the accounting method used in their preparation. To understand the association’s financial position, board members must know which method was used.

  1. Cash. This method is similar to keeping a checkbook. Cash is recorded when deposited in the bank. Expenses are recorded when a check is written to pay a bill. This is the simplest of the three methods but can be misleading. It does not reflect unpaid bills or uncollected assessments. If the board approves a roofing contract for $100,000, that obligation does not show up on the statement until a check is actually written to the contractor. As a result, the financial statement could show the association had a surplus when, in reality, it would be overdrawn if the association paid all its obligations.
  2. Accrual. Instead of tracking cash flow, this method tracks transactions. Income is recorded when earned and expenses are recorded when incurred. For example, income is recorded when the association bills owners not when the money is actually received. The same is true for expenses. If the board approves a roofing contract for $100,000, the expense is posted though the money may not leave the bank account for another six months.
  3. Modified Accrual. This accounting method mixes cash and accrual. Associations using modified accrual record assessments when due (accrual basis) but record expenses when paid (cash basis). This method is frequently used by management companies for their monthly financial statements to boards of directors.

Pro Forma Budget. The annual operating budget distributed to the membership each year must be prepared on an accrual basis. Civil Code §1365(a)(1).

Read more: Accounting Methods http://www.davis-stirling.com/MainIndex/AccountingMethods/tabid/1203/Default.aspx#ixzz1EzbDXNFp
from Davis-Stirling.com by Adams Kessler PLC

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