The Financial Statements have one primary function:
Provide the Board with the financial information to make decisions relating to the Association’s financial situation
The association’s financial statements are the summary of the financial activity of the association during a given period of time. Financial statements are the final product of the accounting function. There are four primary financial statements:
Balance Sheet
Income Statement
Cash Disbursement
Association Aging Report
The Balance Sheet
The Balance Sheet is the most basic of the financial statements. It includes the association’s assets and liabilities/equities as of a specific date. The Balance Sheet is a fast and easy way to determine the financial health of an association.
Assets are the resources that the association has for future benefit. Assets include items such as funds in the operating checking account, funds in money market accounts, certificates of deposit and possible capital equipment.
Liabilities and Equities are obligations to others. On a Balance Sheet for an association, Liabilities and Equities will generally be Capital Reserves and Retained Earnings. Reserves are funds set aside for future capital repair obligations and are thus liabilities. Retained Earnings is the balance of net income less losses over the years the association has been in existence; profits (excess income) retained by the association. Retained Earnings are an equity account.
The second to last category on the Balance Sheet will be either the Net Income or Net Loss calculation. Net Income is the total of excess income over expenses, while Net Loss is the excess expenses over income.
* The retained earnings (+/-net income/loss) amount is not indicative of how much cash the association has but, rather, represents how much unobligated cash (assets) the association has. (Reserves are obligated to be used for roofing, paving, etc.)
The Income Statement
Whereas the Balance Sheet shows balances as of a specific date, the Income Statement shows the flow of activity and transactions over a specific period. There are incomes from dues etc., and expenses from association operations.
The Income Statement has two primary parts; Operating Income and Operating Expenses. With the Operating Expense part having sub-parts to better explain expenses. Every income and expense item has a corresponding chart of accounts number. There are generally seven columns reflecting either income or expenses.
A good tip to make reading and understanding the income statement easier is to take a sheet of paper and cover all but the first column labeled “Actual.” This first “Actual” column is actually what was brought in and what was spent in the operations of the association in the time period of the statement. The next column is the “Budget” and this is what was budgeted to be received or spent. The third column, “Variance,” is the difference between the first two columns.
The next three columns are Year to Date calculations, whereas the first three columns are dealing with a one month time period. The last column, “Annual Budget,” is the annual budgeted amount. When it comes to reading an income statement the old saying: “How do you eat an elephant?” “One bite at a time”; is exactly how it should be approached.
Cash Disbursement
A Cash Disbursement shows the detailed activity of checks written or electronically transferred from the association’s operating checking account to pay the association’s expenses. WDPM
Copyright – William Douglas Management, Inc. 2016