At the end of each fiscal year, your HOA will be furnished with a few financial documents from your association’s accountant—foremost among them being the HOA balance sheet. A balance sheet is an invaluable snapshot of the association’s basic financial health. With that said, new board members—especially those with no prior accounting experience—do not always know how to ready or interpret a balance sheet.
The balance sheet is structured in accordance with this basic accounting formula: Assets = Liabilities + Equity. Understanding these three accounting terms is important:
- Assets are the positive, valuable things that the association owns. Funds in the bank or in a reserve fund count here.
- Liabilities are monies that are owed to others—including unpaid bills for vendors and suppliers.
- Equity represents what is left over, when liabilities are subtracted from assets. This basically shows how much money your HOA can spend at the moment.
If the association has more savings, cash, and funds on hand than it has monies owed, then is has positive equity—which is obviously desirable! If the community association owes more money than it is taking in, however, then it has negative equity.
When receiving a balance sheet, the first thing to do is check to ensure that the assets column equals the liabilities and the assets; if so, then things are balanced. From there, assess whether the association’s equity is negative or positive, and whether the overall financial health of the community association is strong.
Also note that the HOA balance sheet reflects the realities of your association’s daily operation. In other word, if you don’t like what the balance sheet reflects, there are ways to change it—by reducing what you spend on vendors and supplies or by increasing assessments. (In many cases, the problem stems from assessments not being collected efficiently enough.)
Knowing how to read a balance sheet is an important skill—so for further help, reach out to an HOA manager or even a more senior board member.