Homeowners associations and common interest communities have fiduciary obligations to all their members. There are certain things that are must-dos when it comes to HOA and CIC accounting.First, decide what you’ll do in terms of setting up your operating and reserve accounts. This is critical. Minnesota requires custodial trust accounts through a bank registered in the state of Minnesota.
HOA Operating AccountsOnce you set up your custodial trust accounts, one will be designated as an operating account and one as a reserve account. In the operating account, you have money flowing in and out. Coming in are member dues and any other cash receipts for income that the association has. Flowing out would be vendor checks for services and any contracts for lawn and landscaping. The operating account covers all normal operating expenses, like utility bills or trash bills.
HOA Reserve AccountsThe reserve account is the rainy-day fund for improvements and renovations. You don’t want a lot of money going in and out of this account. Money should move from the operating account to the reserve account when you’re doing a monthly or annual transfer. When you do spend money on an improvement, the money goes from the reserve to the operating account so you can write a check. This keeps your accounting tight and your reserve account doesn’t show any external transfers.
Keeping ReceiptsOne of the common mistakes HOAs face is not retaining all the receipts for their association. You want to be able to accurately track your cash disbursements to vendors. Make sure you keep your receipts as well as invoices and estimates. You need a good paper trail so you can do your taxes and justify correctly whether an expense was an operating expense or a capital improvement expense. That is a statutory requirement; you need to document and justify any transfers out of your reserve. For example, when you take out all the money from your washing machines, you need a system for managing that cash so it isn’t undocumented. You never want undocumented cash or funds. You are the fiduciary party and you’re responsible for the common property including income or cash proceeds. So, document everything. Have two board members count the money so you know what was taken out of the washing machine. Sign a certificate and keep it on file. Record keeping is good and supports the money.
Cash or Accrual AccountingMost people want a cash accounting system. That’s good if you’re smaller but for larger associations, you might have to move onto accrual so you can be more accurate with retaining the recurring cash flow. If your books or management is being done by a CPA, there’s a statutory requirement that books are done on an accrual basis.
A property manager is always a good solution for HOAs. Your manager can help you get over the peaks and valleys. There are a lot of rules and regulations that you need to be aware of. So, if you’re looking for great HOA property management in Minneapolis, please contact us at 33rd Company Property Management. We’d be glad to tell you more about how we can help.