Accrual Basis of Accounting

This method records income when it’s earned and expenses when they happen, regardless of when the cash changes hands.

  • Revenues: Recorded when earned. An "Assessments Receivable" is added to the Balance Sheet until the payment is received.
    • Example: Homeowner assessments are recorded as income when they’re billed, even if the payment hasn’t been made yet.
  • Expenses: Recorded when they happen. An "Accounts Payable" is added to the Balance Sheet until the bill is paid.
    • Example: Service costs are recorded as expenses when the service is provided, not when the payment is made.
  • Impact on Financial Statements:
    • The Balance Sheet will show Aged Assessments Receivable, Prepaid Assessments, and Accounts Payable: 

Aged Assessments Receivable: Lists homeowners who haven’t paid their assessments, how much they owe, and how long it’s been overdue.

Prepaid Assessments: Lists homeowners who’ve paid in advance and how much they paid.

Accounts Payable: Lists bills that haven’t been paid yet.

 

Cash Basis of Accounting

This method only records income and expenses when cash is actually exchanged. 

  • Revenues: Recorded when the money is received.
    1. Example: Homeowner assessments are recorded as income only when the payment is actually received.
  • Expenses: Recorded when the payment is made.
    1. Example: Service costs are recorded as expenses when the bill is paid, not when the service is provided.
  • Impact on Financial Statements:
    • The Balance Sheet doesn’t include Assessments Receivable, Prepaid Assessments, or Accounts Payable.
    • You can create reports for these, but they won’t match the Balance Sheet since they aren’t recorded there.


Modified Accrual Basis of Accounting

This method combines the Accrual and Cash methods and is often used for interim reports. 

  • Revenues: Recorded when earned, like in the Accrual Basis.
  • Expenses: Recorded when paid, like in the Cash Basis.
  • Impact on Financial Statements:
    • The Balance Sheet will show Assessments Receivable and Prepaid Assessments.
    • However, unpaid bills (Accounts Payable) won’t appear on the Balance Sheet because they’re recorded on a cash basis.