B.V. from New Haven County writes:
Dear Mister Condo,
We do not have professional book keeper. I find in the balance sheet generated by the accounting software our grouping of operating fund, reserve fund and equity is possibly not correct resulting in very huge account payables though in reality the amount is almost zero. What mistake are we doing in our grouping?
Mister Condo replies:
B.V., it must be upsetting to find a large accounts payable amount showing in your balance sheet. The only time that should happen is when there are actually large amounts of active debt incurred by the association. The balance sheet is used to show current assets and current liability. It is a very important tool for the Board to use and it is important that it be prepared properly. A professional bookkeeper is not required to prepare a balance sheet but it might make sense for your association to turn to one for help and guidance in the proper preparation or for advice on which software is ideal for your association.
You need to understand the most basic principal of the balance sheet which is to keep assets and liabilities plus equities in balance. With that understanding, the next step is to list all of the assets – cash on hand, in reserve, or invested in interest-bearing instruments like CDs. Also, accounts receivable (unpaid assessments, common fees). To balance that amount, all of the association’s liabilities are listed, including accounts payable.
The difference between assets and liabilities is equity. Hopefully, your assets outnumber your liabilities and the community is in a positive equity position. If liabilities outnumber assets, then the community is in a negative equity position.
I cannot say for certain that you are making any mistake in your grouping from what you have told me but it is possible that whoever is preparing the balance sheet is overstating the liabilities by not adjusting downward the accounts payable as payments are made. If the money has already come out of the cash on hand an entry adjusting the assets has been made. To set off that entry, the accounts payable should also be adjusted, which would keep the balance sheet in balance. That’s why it’s called a balance sheet after all! Good luck!