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Annual Conference and Exposition - Cash versus Accrual Basis Accounting

Annual Conference and Exposition - Cash versus Accrual Basis Accounting

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Cai annual conference 2002 Cai annual conference 2002 Presentation Transcript

  • Annual Conference and Exposition September 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 YEARFACTS: 2001 2002 2003Cash collections from unit owners formonthly 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 Associationmaintenance expenses: From 2001 assessments $80,000 (G) $27,000 (H) $ - (I) From 2002 assessments $6,000 (J) $50,000 (K) $14,000 (L)
  • EXAMPLE YEARDIFFERENCES/RESULTS: 2001 2002CASH 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 $28,000expensesACCRUAL BASIS: Revenue $100,000 $130,000 (D+E+F) (A+B+C) 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 theaccrual 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 Replacement Fund FundASSETS Cash $ 10,000 $ - CD’s - 150,000 TOTAL ASSETS $10,000 $150,000FUND BALANCES $10,000 $150,000
  • ACCRUAL BASIS BALANCE SHEET Operating Replacement Fund FundAssets Cash $ 10,000 $ - CD’s - 150,000 Assessments receivable 30,000 - Prepaid insurance 15,000 - Total Assets $55,000 $150,000Liabilities and Fund BalancesAccounts payable and accrued expenses $22,000 $10,000Due to Sponsor 5,000 - Total Liabilities 27,000 10,000Fund Balances 28,000 140,000 Total Liabilities and Fund Balances $55,000 $150,000
  • VARIANCE ANALYSIS (Cash Basis) Actual Budget VarianceRevenue: Assessment $75,000 $ 90,000 $(15,000) Parking 15,000 10,000 5,000Total 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 5,000Total Operating Expenses $76,000 $90,000 $14,000 Reserves 10,000 10,000 -Total Expenses $86,000 $100,000 $14,000Excess Revenue Over (Under) Expenses $4,000 $ - $4,000
  • VARIANCE ANALYSIS (Accrual Basis) Actual Budget VarianceRevenue: 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 3,000Total 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)
  • 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