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Annual Conference and ExpositionSeptember 21, 2002
CASH VERSUS ACCRUAL
BASIS ACCOUNTING
Community Associations
Institute
OUTLINE• Introduction
• Defining Cash Basis and Accrual Basis Accounting
• The Matching Principle
• Illustrative Example/Differences in Results
• AICPA CIRA Guide
• Audited Financial Statements
• Comparison of Balance Sheet Using Each Basis
• Industry Requirements
• Management’s Financial Statements
• Questions and Answers
INTRODUCTION
“How can our bottom line show a loss when our checking account has thousands of dollars in it?”
DEFINING………CASH BASIS
• Simplified basis of accounting
• Reflects actual cash transactions “Cash that comes in” and “Cash that goes out”
• Revenue is recognized when cash is collected; expense is recognized when cash is paid
• Individuals generally operate their personal finances using the cash basis of accounting
DEFINING….….
ACCRUAL BASIS
• Reflects transactions as they occur
• Revenues are recognized when earned; expenses are recognized when incurred – even if revenue has not yet been collected, or the expense has not yet been paid
• No regard to when the related cash transaction took place
• Organizations often use this method of accounting
MATCHING PRINCIPLE
• Recognizes revenues when realized (earned), and expenses when incurred, regardless of when the cash is collected or paid
• This method, “matches”, or offsets revenues with the expenses during the period in which they both occur; i.e. special assessment
EXAMPLE YEAR
FACTS: 2001 2002 2003Cash collections from unit owners for monthly maintenance fee income:
From 2001 assessments $80,000 (A) $15,000 (B) $5,000 (C)
From 2002 assessments $10,000 (D) $90,000 (E) $30,000 (F)
Cash payments for Association maintenance expenses:
From 2001 assessments $80,000 (G) $27,000 (H) $ - (I)
From 2002 assessments $6,000 (J) $50,000 (K) $14,000 (L)
EXAMPLE YEAR
DIFFERENCES/RESULTS: 2001 2002
CASH BASIS:
Revenue $90,000 (A+D) $105,000 (C+E)
Expenses 86,000 (G+J) 77,000 (H+K)
Excess of revenue collected over (under) expenses
$4,000 $28,000
ACCRUAL BASIS:
Revenue $100,000 (A+B+C)
$130,000 (D+E+F)
Expenses 107,000 (G+H+I) 70,000 (J+K+L)
Excess of revenues over (under) expenses $(7,000) $ 60,000
*NOTE: Using the cash basis, the entity generated a surplus of $4,000, but the accrual basis actually shows a $7,000 deficit!
AICPA – CIRA GUIDE
• Audit and Accounting Guide on Common Interest Realty Associations issued by the AICPA provides guidelines on auditing and accounting for CIRAs
• Provides specific requirements regarding an Association’s year-end financial statements
– “GAAP requires the use of accrual basis accounting. Financial statements prepared on an accrual basis are particularly useful for CIRAs which assess members based on annual budgets, because they include information on amounts payable and assessments receivable from members and thus enable users to compare the results of operations to budgeted amounts.”
AUDITED FINANCIAL STATEMENTS
• Audited financial statements must be prepared using the accrual basis of accounting– Regardless of basis used for
an Association’s record keeping and monthly financial statements
CASH BASIS BALANCE SHEET
Operating
Fund
Replacement
Fund
ASSETS
Cash $ 10,000 $ -
CD’s - 150,000
TOTAL ASSETS $10,000 $150,000
FUND BALANCES $10,000 $150,000
ACCRUAL BASIS BALANCE SHEET
Operating
Fund
Replacement
Fund
Assets
Cash $ 10,000 $ -
CD’s - 150,000
Assessments receivable 30,000 -
Prepaid insurance 15,000 -
Total Assets $55,000 $150,000
Liabilities and Fund Balances
Accounts payable and accrued expenses $22,000 $10,000
Due to Sponsor 5,000 -
Total Liabilities 27,000 10,000
Fund Balances 28,000 140,000
Total Liabilities and Fund Balances $55,000 $150,000
VARIANCE ANALYSIS(Cash Basis)
Actual Budget Variance
Revenue:
Assessment
Parking
Total Revenue
$75,000
15,000
$90,000
$ 90,000
10,000
$100,000
$(15,000)
5,000
$(10,000)
Expenses:
Utilities
General maintenance
Administrative
General
Total Operating Expenses
Reserves
Total Expenses
Excess Revenue Over (Under) Expenses
$20,000
30,000
21,000
5,000
$76,000
10,000
$86,000
$4,000
$ 20,000
35,000
25,000
10,000
$90,000
10,000
$100,000
$ -
$ -
5,000
4,000
5,000
$14,000
-
$14,000
$4,000
VARIANCE ANALYSIS(Accrual Basis)
Actual Budget Variance
Revenue:
Assessment
Parking
Total Revenue
$90,000
10,000
$100,000
$ 90,000
10,000
$100,000
$ -
-
$ -
Expenses:
Utilities
General maintenance
Administrative
General
Total Operating Expenses
Reserves
Total Expenses
Excess Revenue Over (Under) Expenses
$20,000
40,000
30,000
7,000
$97,000
10,000
$107,000
$(7,000)
$ 20,000
35,000
25,000
10,000
$90,000
10,000
$100,000
$ -
$ -
(5,000)
(5,000)
3,000
$(7,000)
-
$(7,000)
$(7,000)
REPORTING
• Financial Reporting
• Management Reporting
• Membership Reporting
DECISION MAKING
• Monthly Planning
• Annual Planning
• Discretionary Spending
• Long Term Planning
• Collection Problems
BUDGETING
• Annualized Actuals
• Misguided Assumptions
• Long Term Funding
• Special Assessments
CONCLUSIONQUESTIONS & ANSWERS