Cash vs Accrual vs Modified Accrual for HOAs

HOA Money · Board Basics

Cash basis records money when it moves. Accrual basis records dues when they’re billed and bills when they’re owed. Modified accrual sits in between. For most HOAs, accrual or modified accrual gives the board a truer picture, because it shows who owes the association and what the association owes.

The three methods at a glance

Cash basis

• Good: simple, matches the bank account.
• Risk: hides unpaid dues and unpaid bills. A board can think it has money it’s already committed.
• Fits: very small associations with few bills and no delinquencies.

Accrual basis

• Good: shows dues owners owe and bills the association owes. Prepaid insurance is spread over the year.
• Risk: more work, and harder for volunteers to keep up.
• Fits: larger associations, condo buildings with big budgets, and any association planning an audit.

Modified accrual

• Good: captures what matters most, dues receivable and unpaid bills, without every accrual adjustment.
• Risk: needs a clear, written description so reports stay consistent.
• Fits: most mid-size HOAs.

A mountain example

A Keystone condo association pays its full-year insurance premium in November.

• Cash basis: November shows a huge expense and the year looks like a disaster.
• Accrual basis: the premium is spread over 12 months, so each month shows its fair share.

Same money, very different picture for the board.

What Colorado law says

CCIOA doesn’t dictate a method for day-to-day books. When an audit or review is done, the report covers financial statements prepared using GAAP or the cash or tax basis (C.R.S. 38-33.3-303(4)(b)). We’re an accounting firm, not an audit firm, and we don’t do audits, reviews or compilations. More on that in our guide to audits, reviews and compilations.

How to choose

1. Check your governing documents for a required method.
2. Think about who reads the reports and what they need to see.
3. Consider whether you’ll need an audit or review.
4. Pick one method and use it every month, so reports compare cleanly.

We keep most associations on accrual or modified accrual so the board sees unpaid dues and bills. See our HOA accounting services and pricing.

What changes on the reports

• Accounts receivable shows up only on accrual or modified accrual. That’s the list of owners who owe.
• Accounts payable shows bills received but not yet paid.
• Prepaid assessments show owners who paid ahead.
• Prepaid insurance spreads a big premium across the months it covers.

On cash basis, none of these appear. The board sees only what’s in the bank, which can look healthy right before a large bill arrives.

And for taxes

The HOA’s tax return should be prepared on a consistent method from year to year. Your tax preparer will confirm which one the association uses. See our HOA tax returns page and our guide to reading HOA financial statements.

Which method should a small HOA use?

A small planned community with a handful of bills and almost no late payments can run fine on cash basis, as long as the board also tracks who owes dues. Once the budget grows, insurance is paid yearly, or delinquencies appear, accrual or modified accrual starts to pay for itself. The board sees obligations before they turn into surprises, and year-end tax work gets simpler.

A quick checklist

• Does the balance sheet show who owes dues? If not, you’re on cash basis.
• Is the annual insurance premium spread across the year?
• Do unpaid bills show up as accounts payable?

This is accounting education, not legal or tax advice.

FAQ

Which accounting method is best for an HOA?

Accrual or modified accrual gives a truer picture because it shows dues owed and bills not yet paid. Cash basis is simpler and can work for very small associations.

Does Colorado require HOAs to use accrual accounting?

No single method is required for everyday books. If an audit or review is done, CCIOA allows the financial statements to be prepared using GAAP or the cash or tax basis of accounting, under C.R.S. 38-33.3-303(4)(b).

What is modified accrual for an HOA?

A mix: it usually records dues when billed and bills when received, like accrual, but skips items like depreciation or some prepaid expenses to keep things simpler.

Can we switch methods?

Yes, usually at the start of a fiscal year. Your accountant should note the change and make sure the tax return is prepared on a consistent basis.

Sources

• C.R.S. 38-33.3-303 (audit and review basis)