An overwhelming number of communities rely on outdated accounting programs and billing practices that result in faulty ledgers.
Are your community association ledgers being kept properly? Are they in good enough order that you would sit in a courtroom and swear under oath that they are accurate? If you have any doubt here are a few pointers that may help keep your ledgers in good order.
What you need to ensure your community association ledgers are in order
As with anything in a community association the first thing you must do is read the governing documents and answer the following questions:
- What is your pay period (monthly, quarterly, annual)?
- What day are your assessments due?
- What is the grace period allowed in your governing documents?
- Do your governing documents call for late fees to be charged, and how much are they?
- If your governing documents do not indicate late fees do the statutes in your state default to a given amount?
- Do your governing documents call for late interest to be charged and what is that rate per year?
- If your governing documents are silent on late interest in your state can you default to a given amount? Check documents and statutes to determine if late interest is charged against principal (late assessments only) or if they are charged against the entire accounts receivable balance.
- What is the proper application of payments in your state?
This may seem like a lot of information to dig up, but its right there in your governing documents and state statutes. Every manager should be able to put this information together easily.
If you are still not sure then perhaps you should ask your community association attorney about state statutes and your governing documents regarding ledgers. Your accountant could also guide you in these matters.
How to perform a simple audit on your ledgers
An easy way to test the accuracy of your ledgers is to dig up one or two that are only delinquent for two or three months. On such a short-term delinquency, you can see things clearly because there are not too many entries on the ledger.
If you find that a ledger that is delinquent for three months is complicated and difficult to understand, that is a sure sign of a problem and you can rest assured that older ledgers have the same problem but magnified.
A simple test
For demonstration purposes, here is an example of what that might look like. Assume for this community association ledger the following information:
- Regular Assessments are $500 per month
- Payments are due monthly on the first and late after the 15th of the month.
- Late fees are $25.00.
- Late interest 18% per year.
- This owner has not paid his assessments for three months.
- The order of payment application is as follows: Payments are first applied to interest accrued by the association, then to any administrative late fee, then to any costs and reasonable attorney fees incurred in collection, and then to the delinquent assessment
Let’s assume that the owner has not paid since February 2018 and is three months past due. The date of this ledger is May 1 and the monthly assessments have been charged.
Payments must be applied in the proper order
Now let’s assume that the owner sends a check for $1,000.00 on May 1, 2018, which is less than the full balance that is owed at that time. In this statement, the application of payments is as follows: 1) late interest 2) late fees 3) legal costs 4) collection fees 5) assessments.
The resulting ledger the day after the payment would be drastically simplified. Because all prior interest was “wiped out”, it will start calculating again the following day on the outstanding balance.
Problems to look for
If your accounting software doesn’t automatically adjust the ledgers based on predetermined payment applications, then that is a problem. If the ending balance is not spot on that can open the door to a multitude of problems that will take up your manager’s valuable time.
The slightest error in a ledger can jeopardize your ability to enforce collections actions. Facility issues are just as important as accounting practices and accurate ledger maintenance is the foundation of good community association governance.