1. Annual Conference and Exposition
September 21, 2002
CASH VERSUS ACCRUAL
BASIS ACCOUNTING
Community Associations
Institute
2. 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
3. INTRODUCTION
“How can our bottom
line show a loss when
our checking account
has thousands of
dollars in it?”
4. 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
5. 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
6. 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
7. EXAMPLE
YEAR
FACTS: 2001 2002 2003
Cash 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)
8. 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) $4,000 $28,000
expenses
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!
9. 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.”
10. 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
11. CASH BASIS BALANCE SHEET
Operating Replacement
Fund Fund
ASSETS
Cash $ 10,000 $ -
CD’s - 150,000
TOTAL ASSETS $10,000 $150,000
FUND BALANCES $10,000 $150,000
12. ACCRUAL BASIS BALANCE SHEET
Operating Replacement
Fund 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
13. VARIANCE ANALYSIS
(Cash Basis)
Actual Budget Variance
Revenue:
Assessment $75,000 $ 90,000 $(15,000)
Parking 15,000 10,000 5,000
Total Revenue $90,000 $100,000 $(10,000)
Expenses:
Utilities $20,000 $ 20,000 $ -
General maintenance 30,000 35,000 5,000
Administrative 21,000 25,000 4,000
General 5,000 10,000 5,000
Total Operating Expenses $76,000 $90,000 $14,000
Reserves 10,000 10,000 -
Total Expenses $86,000 $100,000 $14,000
Excess Revenue Over (Under) Expenses $4,000 $ - $4,000
14. VARIANCE ANALYSIS
(Accrual Basis)
Actual Budget Variance
Revenue:
Assessment $90,000 $ 90,000 $ -
Parking 10,000 10,000 -
Total Revenue $100,000 $100,000 $ -
Expenses:
Utilities $20,000 $ 20,000 $ -
General maintenance 40,000 35,000 (5,000)
Administrative 30,000 25,000 (5,000)
General 7,000 10,000 3,000
Total Operating Expenses $97,000 $90,000 $(7,000)
Reserves 10,000 10,000 -
Total Expenses $107,000 $100,000 $(7,000)
Excess Revenue Over (Under) Expenses $(7,000) $ - $(7,000)
