HOA reserve accounting steps

I'm here to help you out, qbofree5.

Let's start by creating new accounts in QuickBooks for the reserve accounts. Here's how:

1. Go to Settings ⚙ and select Chart of Accounts.
2. Select New to create a new account.
3. In the Account Type ▼ dropdown, choose an account type.
4. In the Detail Type ▼ dropdown, select the detail type that best fits the transactions you want to track. Learn more about detail types.
5. Give your new account a name.
6. If this is a subaccount of an existing account, select Is sub-account and then enter the parent account. Learn more about parent accounts and subaccounts.
7. Now let's make sure the account in QuickBooks matches your real-life bank or credit card account. Choose when you want to start tracking your finances. In the Balance field, enter the amount in the account, and determine the as-of-date. Enter today's date if you want to start tracking immediately.
8. When you're done, select Save and Close.

Once the reserve account is created, you can use the Transfer feature to fund the account. I'll show you:

1. Select + New.
2. Select Transfer.
3. From the Transfer Funds From the dropdown list, select the bank account that the money is coming from.
4. From the Transfer Funds To dropdown list, select the bank account that the money is going to.
5. In the Transfer Amount field, enter the amount being transferred.
6. Edit the Date field.
7. Enter a description of the transfer in the Memo field (optional).
8. Select Save and close or Save and new to complete the transfer.
9. Select Yes if you double-checked the date.

Please keep us posted if you need additional assistance with the process. We're always here to help you out.

Thank you.  The problem we are having is the reserve funds, four of them, are not actually in a separate bank account.  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.  We don't physically move the money.  It is not new income.  A non operating expense.  How to categorize in chart of account and how to transfer funds without actually depleting the balance in the savings account.  Thank you very much for your help.

Thanks for getting back to us, @qbofree5-gmail-c. 

Along with the steps my colleague has provided above, I recommend consulting with your accounting professional for this one. Your accountant can review your books and advise the best way to record the transfer based on your business needs. If you don't have an accountant, don't sweat it. You can find one here in our Resource Center. 

Please let me know if you have any other questions or concerns. Take care! 

Yes…why will no one answer this question?  Everyone says go to an accountant.  No matter where I ask.  I would think this could be answered here being that this is an accounting software company.

Thanks for chiming in, qbofree5-gmail-c,

Just so you know, we are primarily technical support. We are not able to give out legal or accounting advice. However, if you are needed an accountant, we offer a ProAdvisor service where you can connect with an expert within your area! A few offer a free consultation as well. Feel free to check it out below.

• QuickBooks ProAdvisor 

Let me know if you have any other questions! My team and I will be happy to help. Take care. 

Thank you.

You're welcome, qbofree5-gmail-c. 

@qbofree5-gmail-c 

I have been a treasurer for a couple of HOAs.  Reserve funds should be recorded as equity.  If you know the amount when you deposit the funds, you can assign the Reserve equity account to the deposit.  If they were recorded as something else when deposited, they can be moved with a journal entry.  Let me know if you need more help with this.  

Yes, still need help.  I am being told i cannot do a sub account in the bank account.  What “exactly” are the entries to move the money from the bank account to the reserve account.  Make a chart of account for reserves (equity).  Debit reserves, credit bank account?

Yes still have questions.  Chart of accounts Reserves (equity/liaibility/asset?).  What is journal entry to move money from savings into reserve account without affecting savings account balance?

@qbofree5-gmail-c 

There's no need to create a separate bank sub-account.  You can create an equity account with the reserve balance.  That allows you to see how much has been set aside for reserve replacements but still keeps the cash in the savings account. 

The proper way to handle reserves is to start by recording all dues from the homeowners as income. Then, make a journal entry that will simultaneously create an expense for the amount put into reserves and allocate those funds to a reserve equity account.  That will offset the HOA's income since reserves are not taxable but it will not have any effect on the bank account.  To do that, after you have recorded the dues received as income, make a journal entry and debit your Replacement Reserves expense account (set one up if you don't have one) and credit your Replacement Reserves equity account (set one up if you don't have one) for the amount that the board has authorized to fund the reserve account.     

Thank you very much.

@Rainflurry 

When setting up the reserve equity account, which detail type did you choose for the account? I think I may be getting confused at the choices.

Rainflurry,

you seem very knowledgeable about HOA bookkeeping and maybe you’re able to answer this question for me.

when I have to move funds from reserve to pay for reserve items, (roof, skylights, etc..) how do I account for the items without them showing up in our annual budget?

I’m new to this and when I paid for reserve items, they’re now showing up in my annual budget as an overage and I don’t want that since these items were not part of the annual budget.

Thanks in advance!

Linda

@Linda48328 

When paying for reserve items, the payment should be recorded as a reduction in reserve equity, not an expense (it should have been recorded as an expense when it was moved to the Reserve Equity account).  That should keep it off your budget.  I like to use a separate equity account called 'Capital Expenditures' and assign the payment to that.  The Capital Expenditures account serves as a contra-equity account, meaning the balance in the account will always be negative.  That way, reserve expenditures will be a separate line item on the balance sheet which makes it easier to read, IMO, for the board and the owners.  And, it allows you to more easily locate find those costs.  

Thank you very much for your detailed explanations of setting up reserve accounts, funding them and making payments for them.  I was wondering why wouldn't you record the payment in the Replacement Reserves (ex Roofing Reserves) equity account instead of Capital Expenditures account?

@Rainflurry 

Was just checking if you saw my question and could provide any additional information.

Thanks

@angelv 

I didn't see your post until now. 

I was wondering why wouldn't you record the payment in the Replacement Reserves (ex Roofing Reserves) equity account instead of Capital Expenditures account?

It's personal preference.  I prefer to see Capital Expenditures as a negative equity amount because it allows you to see capital expenditures relative to total Reserve Equity.  For example, say you have booked $300K in reserves and you have had $250K in capital expenditures.  If your balance sheet just shows $50K in reserve equity, it's difficult to understand the relative amount that $50K is to the total collected and spent.  If you just show $50K in reserve equity, there would be no difference between an HOA that has collected $60K and spent $10K in capital expenditures or an HOA that has collected $1M and spent $950K - they would both show $50K in reserve equity.  In the first case, they probably have adequate reserve equity whereas in the second case, they are probably running it too thin.  I just think it's better for the HOA Board, management company (if applicable), and owners to see that.  Here is what that looks like on one of our HOA's recent balance sheets:

Hope that helps.

@Rainflurry 

No problem, I didn't have your name in the first reply

I guess I was just thinking along these lines:

$50,000 HOA dues come in to Income

Then $8,000 is expensed to Insurance Escrow Expense and is "transferred" to Insurance Escrow Reserve account

$3,000 is expensed to Roofing Reserve Expense and is "transferred" to Roofing Reserve account

$2,000 is expensed to Capital Expenditure Expense and is "transferred to the Capital Expenditure Reserve account

Then when the Insurance is paid $2,000, it comes from the Insurance Escrow Reserve account.

$8,000

(2,000)

$6,000 left in Insurance Escrow Reserve Account

Maybe I am over doing it, I just thought this would show kind of the same you were saying. I appreciate your knowledge, information and responses.

Angel

@angelv 

I'm not sure what you mean by 'Insurance Escrow Expense' and 'Insurance Escrow Reserve'.  Insurance is not a reserve item, it is an operating expense.    

Yeah, I think you're overdoing it.  Based on your governing docs, you will expense the amount approved by the Board to Reserve Equity with a journal entry: debit Replacement Reserve Expense, credit Reserve Equity.  That's all you need to do to account for the amount placed into reserves.  Then, when the HOA incurs expenses related to replacing reserve items, You would assign the Capital Expenditures equity account to the bill/payment.  That's it.  I have seen HOAs with $300K in annual income not even get that much correct. 

If you want to further differentiate the reserves into roofing, etc., that's up to you but most HOAs have too many replacement reserve items (roofs, siding, walkways, decks, etc.) that creating a separate entry for each of those in the equity section will clutter up your balance sheet.  Not to mention that you may need some of the roofing equity to pay for an unexpected repair/replacement.  That gets messy.  

@Rainflurry 

Ok, thanks. Those are the three Reserves we have.  I am basically replacing the accounts in your journal entry: debit Replacement Reserve Expense, credit Reserve Equity with the 3 separate Expense accounts and the 3 separate Reserve accounts.  An amount is set aside each month to accumulate or reserve those funds for the payments for the renewal of the insurance the following year.

Thanks again for all of your help,

Angel

Thanks @Rainflurry , you’re a huge help! Always the right answers for those of us struggling to figure out how to properly do things for our HOA through QB

@Rainflurry 

Thank you for all your help. I feel so dumb sometimes and you make everything easy!

I do have another question if you don't mind weighing in.....

We have a loan and the way I set it up when making a payment is a liability reduction and the interest as an expense. The only thing that confuses me is when looking at the budget.  When I set the budget it has to include the total loan repayment amount but when you look at the budget vs actual, it only takes the interest amount into consideration. Am I missing something? How do I account for the principle payment on the budget?

@Linda48328 

"The only thing that confuses me is when looking at the budget."

Good observation.  A budget just deals with items of income and expense.  Because payments for the principal amount on a loan liability are a reduction in both cash and the liability amount (both balance sheet accounts), you need to set up a cash flow forecast to see the effects on your cash balance.  QBO has a good cash flow planner: Dashboards > Planner.  It will pull in all bills and invoices that you have entered and you can use 'Add item' to enter other future cash transactions.