Why modified accrual accounting

If transactions are not a current resource or use, they are not reported in the operating fund of the fund financial statement for example, capital assets or long-term liabilities. Under GASB 34 , these noncurrent activities are reported on the government-wide statements only. Depreciation expense is not recorded for governmental funds under the modified accrual basis — assets are instead expensed in the operating fund when purchased because they are a current use of funds.

Under accrual accounting, expenditures are recognized as soon as a liability is incurred regardless of the timing of related cash flows. However, under the modified accrual basis, GAAP provided modifications to the general rule in the areas of inventories and prepaid items. But, arguably, its biggest advantage is its ease of use. If your HOA is more concerned about its long-term financials, though, Accrual Accounting is the best method to adopt.

Therefore, it allows you to make important decisions based on reliable information. HOAs have to be extra careful about their accounting practices to avoid unnecessary audits or substantial taxation fees. It is a burden for HOAs when they have to manage these practices. It is usually best to consider outsourcing accounting needs because it will free up time for HOA management to focus on other important aspects of their community.

Typically, it is best to find a company that can help your HOA with many of its management needs to provide better service to your community members. If you take the time to make this transition, the approval of your HOA will increase dramatically with your residents. However, if you want accurate financials, it is best to go with Accrual Accounting.

Ultimately, the decision lies with you and your HOA. Keep in mind, though, that the method you choose can make or break your financial stability. Plus, switching accounting methods on the regular can come with a fair amount of trouble and headache. So, make sure to choose wisely. In addition, depreciation expense is not recognized. Instead, assets are charged to expense when purchased.

There are several naming conventions that distinguish modified accrual accounting from accrual basis and cash basis accounting. For example, net income is instead called an excess or deficiency, while expenses are instead referred to as expenditures.

Governmental Accounting. Accounting Books. Finance Books. Operations Books.