This is a non-CPA asking an accounting question.
The Bylaws of our condominium requires a fee equal to the estimated
Annual Common Expense Assessment payable on the initial sales or
subsequent sale of property. These funds are considered to be working
capital which may be utilized by the condominium association in its
reasonable discretion to meet unanticipated or other expenses of the
association. These funds are not required to be segregated from other
funds of the association.
Our prior accountant recorded the receipt of these funds through the
Income Statement and then transferred these funds onto the Balance
Sheet. Our new accountant has recommended that upon receipt of these
fees we directly record the fees onto the balance sheet.
Are both of these accounting approaches correct and, if so, which is
the preferred methodology.
You don't say if any of the funds are refundable to the current owner
if/when they sell. If they are not going to be refunded, then they should
be recorded on the income statement when received, if not sooner when billed
or otherwise accrued.
Of course, the other entry to the recording of income generally is to cash,
which is a balance sheet item.
The reason that you don't record any liability is because there is not a
known amount of a payable (as there would be if a calculable portion is
refundable) as there is when you record a liability for a bill.
Paul Thomas, CPA
Accounting is a science. There are certain "musts" in accounting, as in
there must be an equal balancing entry for every entry made. That is, to
increase an asset (a debit entry), which is what you do when you make a
deposit, there must be an equal amount of credit entries. Credit accounts
are revenues and liabilities and equity. Knowing where something goes
isn't that difficult.
Equity isn't a term used in homeowner association accounting, but it's more
like "fund balance" that is commonly used in non-profit accounting.
Making a deposit of those funds does not create a liability because nothing
is "due" to anyone. I don't see it as any sort of equity or fund balance
entry either. It more closely resembles revenues of sorts, as it's the
one-time or annual dues assessment that covers maintenance and repairs,
utilities and taxes, and whatever other expenses the association has deemed
are those of the association at large.
Now, you may create different fund balances out of the net assets such that
you allow for the setting aside of certain funds to cover those big-ticket
items like roofing, exterior painting, repaving of the roads, etc., and that
is acceptable. But the fund balance is just the amount of assets over
On the area of liabilities, you can't book a liability (a payable) until the
amount is known and enough of the events have transpired to create the legal
obligation. To book a liability for roof repair, when it might be another
12 years before the roof is replaced is not acceptable accounting practice.
Most people don't book a liability until the bill comes in, and if it
remains unpaid as of the reporting date, it's a liability. Of course, if
it's paid prior to the reporting date, it's listed as an expense on the
Paul Thomas, CPA
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