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