The argument for funding only a portion is that, frequently, an asset can be renovated rather than replaced thus saving the cost of 100% replacement. If your HOA wanted to update the clubhouse, this renovation project would likely come out of your savings account. Therefore, this renovation work would come out of the HOA reserve fund. Every business, family, and individual should have a rainy-day fund to take care of larger projects and unforeseen fixes. If its reserve fund is too low, or doesn’t exist at all, those unforeseen expenses fall onto residents, and could set them back thousands of dollars.
The funding for these capital improvements comes from the money set aside in a reserve fund. Balancing the HOA reserve fund isn’t just about matching reserve income with expenses. It’s a strategic move that takes into account the starting point, external factors, and the ultimate goals of funding. As board members, it’s crucial to pick a safe target and plan ahead, ensuring the financial health of the association while making fiscally responsible decisions. At the end of the day, every Board needs to make the decisions that are right for their own community.
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If an unforeseen event occurs and necessary funds aren’t set aside, a special assessment may need to be issued. The most significant difference is that these accounts are not mandatory and do not have to be maintained or waived according to the Homeowners Association Act. Reserves are income when collected and an expense when moved to equity on the balance sheet.
The law requires associations to prepare pro forma operating budgets that include all estimated expenses and revenues using the accrued basis method of accounting. The duty of good-faith loyalty includes not wasting or misappropriating an association’s money, including reserves. HOA funds should only be used for their intended purposes and in the best interests of the community. Anything less potentially hoa reserve accounting journal entry breaches the board’s fiduciary obligation. Condo associations in Florida, for instance, can only expend reserve funds for authorized reserve expenditures or if a specific outlay is approved in advance by majority vote of the association. An association’s annual budget takes into account reasonably foreseeable expenses like landscaping, equipment upkeep, and payroll if the HOA has employees.
Credit the Surplus to Next Year’s Expenses
The association should endeavor to accurately calculate its estimated expenses and revenues as overstating anticipated expenses to put into a reserve account is not consistent with the statute’s budgeting requirements. There is a distinction between “Reserves” and “Maintenance Expenses” which are part of the yearly operating expenses, like lawn maintenance. “Reserve Contributions” are accumulated for years until the component needs replacement or renovation. While the modified accrual method is less complex than the accrual method, the main downside is it does not always accurately match all expenses and income in the fiscal month in question. Because expenses follow a cash basis, monthly reports may mislead associations. As an example, if the board approves a $50,000 roofing contract, it will not show up on monthly reports until the check is written.
The funds are all in the money market account savings account and we just want to transfer and show balances without actually moving the money from the savings account so that we can still balance the account correctly. How to categorize in chart of account and how to transfer funds without actually depleting the balance in the savings account. With a special assessment, the community is paying all-at-once what it could have paid over time.