HOA Financial Statement Review: How to Read a Balance Sheet

Quick Answer

An HOA financial statement package usually has a balance sheet (what the association owns and owes on one date), an income statement (revenue and expenses over a period, compared with the budget), and supporting reports such as a delinquency list and bank reconciliation. To review it, check four things in order: is there enough operating cash, are reserves being funded, are owners paying, and do actual expenses track the budget? The numbers should also tie to each other and to the bank statements.

The Reports in a Monthly Package

Most boards receive the same handful of reports each month. Knowing what each one is for makes the review faster, because every report answers a different question.

For a wider look at what belongs in the package, see our HOA financial statements guide. This article focuses on reading the two core statements line by line.

How to Read the Balance Sheet

A balance sheet always follows one equation: assets equal liabilities plus fund balances (the association's equity). If a report does not balance, something is wrong with the books, and you should ask before reading further.

Assets: what the association holds

• Operating cash: checking and money market accounts used to pay bills. This is the first number to look at.
• Reserve cash and investments: money set aside for major repairs and replacement. It should be tracked separately from operating cash and appear as its own line.
• Assessments receivable: money owners owe but have not yet paid. A large or growing number here means cash is lagging the budget.
• Prepaid expenses: insurance premiums or contracts paid ahead. These are real assets but not cash you can spend.
• Allowance for doubtful accounts: a reduction to receivables for amounts the association does not expect to collect. Not every association records one.

Liabilities: what the association owes

• Accounts payable: bills received but not yet paid.
• Prepaid (advance) assessments: owners who paid ahead. This is money held for future months, not income you have earned yet.
• Accrued expenses: costs the association has incurred but not been billed for, such as the month's utilities.
• Loans and special assessment obligations: any borrowing, with the terms in the notes.

Fund balances: what is left

Many associations use fund accounting, which separates the operating fund from the reserve fund. Each fund has its own balance. The reserve fund balance on the balance sheet should match the reserve account holdings, and the operating fund balance tells you whether the association has a cushion or is running tight. If your reports show a single combined equity number, ask your treasurer or manager how reserves are tracked.

How to Read the Income Statement Against the Budget

The income statement lists revenue and expenses. In a board package it should be set up as budget versus actual, with columns for the current month and year to date, plus a variance (the difference).

Revenue

Assessment income is usually the largest line. Compare billed amounts with the budget first. If billed income matches the budget but the balance sheet shows rising receivables, the association is billing correctly but not collecting. Also look at late fees, interest, clubhouse rentals and other income, which are often small but easy to over-budget.

Expenses

Read each category rather than only the total. A favorable total can hide an overspent category offset by an underspent one. Ask three questions about any variance:

• Timing or real? Annual bills such as insurance or a tax filing can make one month look high or low without changing the full-year result.
• One time or recurring? A single storm cleanup is different from a utility line that runs over budget every month.
• Does it change the year? Project the year-to-date trend forward and see where the association lands against the full budget.

There is no single percentage that makes a variance acceptable, so set your own investigation trigger with the board, for example any line over a dollar or percentage amount you agree on, and apply it consistently.

The reserve contribution

The monthly transfer to reserves can show up as an expense, a transfer between funds, or not at all on the operating statement, depending on how the books are kept. Ask how it is recorded so you do not misread the bottom line. A budget that shows a surplus before reserve contributions may show a smaller surplus or a deficit after them.

Cash, Reserves and Delinquencies

Cash flow

Income can look healthy on paper while cash is tight, because assessments are billed before they are collected. Compare operating cash with the next two or three months of expected bills. If the association has an annual insurance premium or a large contract coming due, check that cash will cover it.

Reserve balance

The balance sheet shows how much is in reserves. Only a reserve study shows how much should be there. Compare the two. See our guide to HOA reserve funds for how studies and funding plans work. Reserve requirements vary by state, so confirm what applies to your association with counsel.

Delinquencies

Ask for the aged receivables report, which groups unpaid balances by how late they are. Look at three things: total dollars owed, number of owners behind, and whether the oldest balances are being worked through your collection policy. The balance sheet receivable should equal the total on this report. Our delinquency and collections guide covers the process, and collection steps and limits are set by state law and your documents.

A Worked Example With Illustrative Numbers

These figures are made up for teaching. They are not averages and not a benchmark for any real association.

Imagine a small association at month end. Its balance sheet shows:

The two totals match, so the statement balances. Now the budget versus actual for the same month:

The bottom line looks fine because repairs came in low, but that saving may reverse next month, and the utility overage deserves a call. In this example the $9,500 in receivables is about a third of one month's billing, so ask whether it is concentrated in a few owners or spread widely, and how old the balances are. That is the kind of follow-up a single total will not give you.

Red Flags to Raise Early

• The balance sheet does not balance, or net income on the income statement differs from the current-year figure on the balance sheet.
• Reports arrive late, or the bank reconciliation is missing or more than a month behind.
• Reserve transfers are skipped, or reserve money is used for operations without a board vote and a repayment plan.
• Receivables grow month after month with no collection activity.
• Large unexplained entries, journal entries or round-dollar adjustments.
• Vendor payments with no invoice, no approval, or to a payee no one recognizes.
• Payments approved and issued by the same person with no second review.
• A single vendor or related party receiving a large share of spending without a bid.

What Boards Should Do

• Review the full package every month, not only the cash balance, and note in the minutes that you did.
• Require budget versus actual with a variance column, and agree on a threshold for explaining variances.
• Match the reserve account balance to the reserve fund line, and compare it with the latest reserve study.
• Have someone other than the person who pays bills review the bank reconciliation.
• Ask for the aged receivables report and confirm it ties to the balance sheet.
• Decide whether your size and documents call for an audit, review or compilation, and check state requirements. See audit vs. review vs. compilation.
• Use the budget cycle to fix recurring variances. Our budget process guide shows how.
• For a broader oversight checklist, read the board member's guide to financial oversight and HOA accounting basics.

Frequently Asked Questions

What financial statements should an HOA board review?

At minimum: the balance sheet, income statement with budget comparison, delinquency report, bank reconciliations and the reserve account statement. Many boards also review the check register and a year-to-date summary each quarter.

What is the difference between a balance sheet and an income statement?

A balance sheet is a snapshot of assets, liabilities and fund balances on one date. An income statement shows revenue and expenses over a period of time. You need both: one shows financial position, the other shows performance.

How do I know if my HOA has enough in reserves?

The balance sheet shows the reserve balance, but only a reserve study can tell you whether it is enough, because it estimates the cost and timing of replacing major components. Requirements and recommended practices vary by state and by your governing documents.

Do HOA financial statements have to be audited?

It depends on your state law and governing documents. Some require an audit, review or compilation at certain sizes or budget levels, and others leave it to the bylaws. Confirm with an attorney or CPA in your state.

Can homeowners see the HOA's financial statements?

Many states and governing documents give owners the right to review certain financial records, often through a request process with deadlines. The details vary by state, so check your statute and bylaws.

What is a good delinquency rate for an HOA?

There is no universal standard. Compare your own trend month to month, look at both dollars owed and number of owners, and check whether collection steps are happening on schedule.

How APM Helps

Association Property Managers provides HOA and condo management from our offices in East Lansing, Michigan and Dublin, California, and remote management elsewhere starting at a flat $99/month per community with no per-door fees or long-term contracts. Financial reporting for the board is part of what a manager handles. See pricing, learn about remote management or request a free proposal, delivered within three business days. Laws and licensing rules differ by state, and we confirm the requirements for your state when we build your proposal.

Legal disclaimer: This article is general information, not legal advice. Laws change and associations differ. Confirm the current requirements and how they apply to your governing documents with a licensed attorney in your state before acting.