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The fees collected by an HOA typically have two purposes:
- To make sure that the HOA is providing and maintaining common areas and amenities in the present.
- To make sure that the common areas and amenities are adequately maintained in the future.
A board which wants to avoid special assessments and understand its financial health needs to keep these two pools of money separate from each other. Board members familiar with non-profit accounting have probably heard the term fund accounting in the past. When an association tracks the two pools of money separately they are preforming fund accounting. Typically these separate funds of money are referred to as the operating fund and the reserve fund.
There are several reasons why an association would want to track these funds separately. Keeping the operating fund separate allows the board of an association to more accurately compare operational expenses on a year to year basis. It allows a board to determine if assessments are adequate to cover yearly operating expenses. A separate reserve fund allows the board to better evaluate the adequacy of funds to pay for future expenses. It helps to prevent over and under assessment of member dues. It saves time in preparing the year end tax return and budget.
Although fund accounting may seem cumbersome to many associations. Once you understand the basics it will make explanation of how the funds are spent to the association members much easier.
Doug McLain, CPA