What is an Income Statement?

Understanding your HOA's financial statements are a vital necessity for board members, and homeowners too.

You don't need to be a professional accountant or bookkeeper or know the differences between debit and credit (and we're not talking about credit and debit cards), but it helps to understand what the basic financial statements look like, what they mean, and how it impacts your association.

In a previous article, we wrote about balance sheets for HOAs. If you didn't read that article, you may want to take a moment to go back and read it. If you think of a balance sheet as a "snap shot" of the HOA's financial situation at a given point in time, you can think of an income statement as a summary of the financial activity for the reported period.

HOA income statements are normally prepared on a monthly basis, but you may see them prepared for a quarter, or even an entire fiscal year.

An income statement goes by different names. In corporate finance, it's common referred to as a "profit and loss" statement, or sometimes a "PnL" for short. A PnL, or an income statement is a summary of all the revenue, all the expenses, and then the net income.

Components of an Income Statement

An income statement is comprised of 3 major components that list all of the income and expenses for the association for the reported period. The line items on an income statement usually correlate to the budget.

Income

The income section is usually listed at the top. For an HOA, this will usually include: assessments (or dues), late fees, fines, amenity income, and/or miscellaneous income. Each line item will contain the amount, and then a total will be displayed at the bottom of the section to show the total income.

Expenses

The expenses section is usually listed below the Income section. The expenses contain a list of all the expenses and the amounts for the month. This can vary widely from one association to the next. For example, a large condominium complex with many assets to maintain will generally have many more expense line items than a small HOA with 60 homes and limited common area to maintain. The expenses will include things like management fees, landscaping, insurance, gas, water, electric, etc., communications (phones, internet, etc.), pool service, repairs, salaries, office supplies, and reserve fund contributions.

For communities with more than 15-20 line items in their expenses, we typically recommend setting up different categories to group the expenses like Professional Fees, Building and Grounds, Administrative, Utilities, Miscellaneous, etc.

Why Are Reserve Contributions Listed on an Expense Statement?

When associations have reserves, the board (or property manager) will routinely have funds moved from the checking account and placed into a reserve account for future expenses and capital projects called reserves. Because the HOA is budgeting on certain amount of income for the year, it is important to include a line item on the expenses to reflect the reserve fund contribution. Because we're taking the HOA out of the checking account (or operating fund), and moving it a reserve fund, we need to list it as an expense on the operating income statement.

When building a budget for the HOA, we strongly recommend creating a line item for the reserve contribution so that when it's time to calculate the assessments for the upcoming year, the HOA board is already factoring that in. Too many times we see associations that just calculate their dues based on their estimated expenses, and if money is left over, they'll transfer it to reserves at the end of the year. Unfortunately this is ill advised and often leads associations with underfunded reserves (just look at what's been going in Florida for the last couple of years...)

Formula for Calculating Net Income in an HOA

The formula for calculating the Net Income on your income statement is simple

Net Income = Income - Expenses.

If the expenses are lower than the income, you have a positive net income. If the expenses are higher than the income, you have a negative net income.

It's important to note that income and cash are not the same thing, especially in accrual accounting. With accrual accounting, income and expenses are realized, or recorded, when they are incurred.

For example, an HOA that bills its dues every 6 months, will show Assessment Income two times per year, to correlate with each billing cycle. Annual assessments will show the income only once year, so on, and so on.

Given that many HOAs do not bill their assessments every month, it's not uncommon to have income statements with a negative net income for several months out of the year.

Other Uses for an Income Statement

While an income statement is used to look at the financial activity for a period of time, usually for a month, it's common to produce different versions of a standard income statement. A YTD income statement will show the year-to-date numbers. It's not uncommon for a management company to prepare an income statement for the preceding month, and a separate income statement for the YTD numbers, so that the board has a full understanding of where they are for the year.

Conclusion

To help make it easier to remember the difference of a balance sheet vs. an income statement, just remember that income statement is for a period of time, where a balance sheet reflects a moment in time.

The income statement, or PnL, is a summary of all the revenue and all the expenses for the month and will show the net income, which is calculated by subtracting the expenses from the revenue.

For more information, feel free to reach out to us!