Overview of Accounting in Community Management
Purpose:
Understanding basic accounting to help manage finances without being an accountant. Community Associations Manager (CAM) responsibilities involve preparation of financial statements and understanding basic accounting terms.
Key Accounting Terms
Financial Accounting: Identifying, recording, summarizing, and analyzing financial transactions. Reporting is performed through financial statements that provide insight into the financial health of the organization.
Assets: What a business owns, which can include cash, inventory, equipment, real estate, and receivables. Understanding the types of assets helps in assessing the community’s financial strength.
Liabilities: What a business owes to third parties, including loans, mortgages, accounts payable, and other debts. Recognizing liabilities is essential for the long-term sustainability of the community's finances.
Equity: Owner's residual interest in the assets after deducting liabilities, often referred to as net assets or net worth. It represents the ownership stake of the members in the community.
Accounting Principles
Accounting Equation: Assets = Liabilities + Equity. This must always balance, reflecting the fundamental principle of double-entry accounting, which ensures that every transaction is recorded in at least two accounts.
Double Entry Accounting: Each transaction affects at least two accounts (debits and credits). Debits must always equal credits, ensuring the integrity of the financial records.
Trial Balance: A summary of closing balances of accounts that ensures the basic accounting equation holds true. Total debits should equal total credits, confirming the accuracy of accounting records before preparing financial statements.
Financial Statements
Balance Sheet: A snapshot of assets, liabilities, and equity at a specific point in time, providing insights into the community's financial position. It helps in understanding liquidity and financial stability.
Income Statement: An overview of revenues and expenses over a specific period, which indicates profitability and the operational efficiency of the community.
Cash Flow Statement: This statement tracks cash inflows and outflows, distinguishing between revenue recognized on an accrual basis and actual cash movements. It is vital for assessing cash liquidity and solvency.
Adjusting Entries and Accrual Accounting
Adjusting Entries: These are required at the end of accounting periods to align financial records with accrual accounting principles, recognizing revenue when it is earned, not necessarily upon cash receipt.
Deferred Revenue: Recognized as a liability until earned. This principle is crucial as it affects how income is reported and impacts financial health indicators.
Audit and Financial Review Requirements
Internal Controls and Procedures
Maintain Internal Controls: Implementing internal controls is essential to prevent errors and fraud. This includes segregation of duties, regular reconciliations, and oversight mechanisms.
Importance of Technology: Using accounting software can streamline the tracking and correction of financial discrepancies promptly.
Responsibilities of Community Managers
Ensuring accurate and current financial transactions, which include recording all receipts, expenditures, and adjustments.
Preparing or overseeing the preparation of financial statements to ensure they are accurate and timely.
Detecting financial red flags via routine financial statement analysis, such as identifying unusual expenditure patterns that require further investigation.
Conclusion
Community managers need enough knowledge to guide discussions and decisions based on financial statements. Understanding financial reports can help managers identify issues, support budgeting processes, and assist boards effectively in decision-making.
Knowt
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