Accounting for condos |

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Good accounting is an important pillar of a happy and healthy condo community. Condos need money to operate. It’s as simple as that. But managing a multi-million dollar budget is not so simple.

With multiple revenue sources, short-term and long-term projects, bills, contractors, and more, taking care of a condo’s finances can be one challenging responsibility. An accounting Excel template may help, as will accounting software. The board has a lot to manage, and often, inexperienced boards will benefit from having help from a property manager, accountant or bookkeeper.

Click here to download our condo accounting excel template

This article aims to highlight some of the key components of accounting for condo associations.

The basics

While condo accounting is a complex and intricate process, you can break it down into three major parts; collecting funds, paying expenses and managing finances.

Collecting funds

Collecting funds is arguably the most important accounting task. The association needs money to operate and provide vital services to residents, and without adequate funding, the building would literally (and figuratively) fall apart. Collecting funds goes beyond condo fees; boards are responsible for issuing and gathering assessment fees, depositing money on time, applying late fees, and working with delinquent accounts. Following up on late payments is particularly important because all payments have essentially been accounted for. If the association does not get money from owners, it cannot cover all of its expenses.

Furthermore, this could lead to an increase in condo fees, or a special assessment, later on. A best practice is to adopt a standard collection process that complies with your governing documents and any state or provincial laws, distribute the late payment rules and collection process to all owners, and enforce it. Finally, encourage owners to reach out to the board or management if they are having difficulties paying fees. It’s better to try and work out a plan with an owner than make them feel as though they have no options.

Paying expenses

Paying bills and other expenses is one of the more time-consuming tasks for an association. Some of the tasks include: reviewing and approving bills, coding bills correctly with the correct general ledger (GL) code so you can create accurate financial statements more easily, handling vendor payments, and taking care of taxes. When bills are not paid on time, late fees accumulate, and this creates additional (and avoidable) costs for the association. Accounting software can simplify this tedious process.

Managing finances

Financial management tasks are broad, but account for responsibilities that include: budgeting to understand how much money the condo needs to cover expenses, maintaining an operating bank account, reserve fund account, and investment account that prioritizes safety, liquidity and return, financial reporting that will be shared with stakeholders and owners, and bank reconciliations. If you don’t have accurate financial reports, you may spend more than the condo has. Additionally, if you don’t regularly check up on your bank accounts or get monthly bank reconciliation reports, you aren’t providing proper oversight to ensure everything is as it should be.

Documentation

Once you understand condo accounting and the tasks that are associated with this responsibility, the next thing you need to think about is how you will properly document where the condo’s money comes from and how it is being used. Every little detail needs to be written down so that you can review the numbers if something doesn’t add up, so that you can share financial information with owners and other relevant parties, and so you can make informed decisions about future financial plans and issues. The items listed below are some of the key accounting documents you will need to successfully manage the association’s finances.

Balance sheet

Think of a balance sheet as a snapshot of the association’s financial standing at a specific moment in time. The balance sheet shows how much money is in the condo’s bank accounts, along with assets and liabilities. Common items on the balance sheet include petty cash, prepaid expenses, insurance payments, interest, vendor payments, prepaid condo fees, etc.

General ledger

A general ledger is a list of the association’s financial transactions. Transactions are ordered by date and numerically. An accounting software system, or a program like Excel, will help you sort through all of these items by category, date or any other variable. Having an up-to-date general ledger is helpful because it allows anyone with permission to see specific details about specific transactions.

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Statements of income and expenses

Statements of income and expenses show the corporation’s financial transactions during a specific timeframe, often for a month at a time. This document makes it easy for the board to see whether the association was over or under budget for a given month. Statements of income and expenses tell a story that is easy to follow, and when they have several of these documents, the board can see if there are certain months where the association spends more than it should, and figure out why that happens.

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Cheque register

This document records all of the cheques that the association writes. It lists who the cheque was issued to, the date, the invoice number, reason for payment, and the mailing address.

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Accounts payable

Accounts payable track all of the condo’s unpaid expenses. That generally includes invoices that are not yet due, or work that hasn’t been completed by a vendor. The accounts payable list allows the board to anticipate how much money will need to be available in the future.

Financial statements

The owners are the principal users of an association’s financial statements. After all, it is their money that finances the operations of the condominium. Financial statements are a record of the stewardship of the board members. These documents are written records that show the business activities and financial performance of the board and the association.

Owners need to be provided with clear and accurate financial information to understand the association’s financial performance. Financial statement information is needed not only by owners, but also by prospective purchasers who want to evaluate the quality of their potential investment.

Financial statements are also important for property managers who may also be involved in statement preparation; external third parties such as trade creditors, mortgagees, commercial lending institutions, and government agencies. These groups will be more familiar with financial statement presentations of business enterprises, and will expect a reasonable degree of uniformity and clarity.

Annual audits

Many associations require an annual financial audit in order to ensure the condo is in good standing. An accounting firm does the audit, but they will rely on the financials produced by the board. The ability to provide reports in a timely manner is one compelling reason to use some sort of accounting system.

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A few thoughts for new board members

If you’re new to the board and aren’t sure about where to start when it comes to the association’s finances, we would recommend familiarizing yourself with each statement and its purpose. The most important documents to review are the balance sheet, income and expenses statement, and bank reconciliation. Look closely at bank and reserve accounts on the balance sheet, and make sure the statement actually balances. When reviewing the income and expenses document, focus on expenses and how they align with the association’s budget. On the bank reconciliation, you’ll want to make sure you can see that the bank statements balance back to the condo association’s books.

Reviewing these statements will help you to get an overall understanding of the condo’s financial status, as well as the statement preparation process.

Similarly, you should get comfortable with reserve studies. A reserve study is a physical and financial analysis of common property and amenities. The study will shine a light on the useful life and replacement costs of the building’s assets, and set the funding needs of the reserve account. Contributions to the reserve fund should be included in the annual budget. It’s wise to conduct reserve studies at least once every three years. As you familiarize yourself with the reserves, confirm the reserve fund account balance matches the study.

You do not need to be a professional accountant to serve on the board, but you do have to be familiar with some financial documents and understand what the numbers mean. There are a lot of moving parts when it comes to condo accounting, which is why it’s best to handle this responsibility as a team. If the board is still unsure about taking on this role, don’t hesitate to seek professional assistance. Use the resources you have to ensure the accounting is done correctly the first time.