Definitions The vernacular of financial management includes the following terms and definitions: ● Account (Line item) : An account or line item is created and used in a budget to define each class of items for which money, or the equivalent is spent or received. It is used in balance sheets, budgets, and other financial reports to organize the finances of the entity and to segregate expenditures, revenue, assets, and liabilities to give interested parties a better understanding of the organization’s financial health. The complete list of such accounts is referred to as a chart of accounts. ● Aging report : A periodic accounts receivable report that lists the amounts owed by delinquent members sorted by the length of the discrepancy (e.g., 30, 60, 90, 180 days or more). ● Asset : Any item of economic value owned by an individual or other entity, especially that which could be converted to cash. ● Balance sheet : A statement of a company’s financial position at a particular moment in time. It shows the two sides of a company’s financial situation, the monetary value of what it owns and what it owes. The value of the company’s assets (what it owns) is always equal to the combined value of its liabilities (what it owes) and the value of its shareholders’ (or association member’s) equity. ● Balanced : The amount budgeted for revenue and the amount budgeted for expenses must be equal. The annual budget for condominiums, cooperatives, and timeshares should be balanced. ● Budget : An estimate of revenue and expenses for a specific period of time. The association should develop the budget to meet its objectives as they relate to its primary functions of protecting, preserving, and enhancing the property and its assets, enhancing the lifestyle of the community, and providing a harmonious community. ● Bulk services : Services, such as cable, Internet, and telephone provided by a community association to its members through a contract, typically multi-year, with a service provider. The cost of the contract is a common expense of the association. ● Bulk services contract : A contract in which an association negotiates and enters into on behalf of its members, for services, such as cable, Internet, and telephone for the purpose of obtaining a more favorable rate for its members than each member would be able to obtain by entering into an individual contract. ● Capital expenditure : Any disbursement of funds for the purchase or replacement of an asset, the useful life of which is greater than one year, or for the repair of an asset that will extend its useful life for a period greater than one year. This includes the funds that are necessary to renew, repair, or replace an asset for it to continue to function as needed. ○ Example : Replacing a generator; reroofing, retrofitting the pool with a solar heater, etc. ● Chart of accounts (COA) : A created list of the accounts used by an organization to define each class of items for which money or the equivalent is spent or received. It is used to organize the finances of the entity and to segregate expenditures, revenue, assets, and liabilities to give interested parties a better understanding of the financial health of the entity. ● Common expenses : The expenses related to the operation, maintenance, repair, replacement, and protection of the common elements and association property, and the cost Unbudgeted expenses An unbudgeted expense refers to an unplanned event, or item; that is, an expense that has not been included in the current year’s budget. Such items may be small (such as a minor leak in the roof), or major (such as a major leak in the roof that results
of carrying out the powers and duties of the association. Community associations are required to budget for all common expenses. ● Contract : An agreement with specific terms between two or more people or entities in which there is a promise to do something in return for a valuable benefit known as consideration. ● Deferred maintenance : Any maintenance or repair that is performed less frequently than annually and results in maintaining the useful life of an asset. ○ Example : Overhaul of the generator; painting a building every five or seven years; touch-up painting is not a deferred expense. ● Deficit : A status of financial health in which expenditures exceed revenue. ● Expense (expenditure) : An expense or expenditure is an outflow of money to another person or entity to pay for an item or service. ● Fiscal year (FY) : A fiscal year is the 12-month period that an organization uses for budgeting and financial reporting. It differs from a calendar year since its start and end dates may encompass any 12-month period including, but not limited to, January 1 to December 31. The bylaws specify the fiscal year of the association. Community associations are required, by statute, to create an annual budget based on the association’s fiscal year. The fiscal year also determines when the association must submit its tax return and taxes to the IRS. ● Income : In strict accounting terms, refers to the profit or the money that remains after deducting expenses from revenue. However, community associations typically use revenue and income interchangeably, as we will in this course. ● Limited common elements (LCE) : Some associations have limited common elements, such as a penthouse swimming pool or a garage that are restricted to the use of specific members. If the association’s governing documents identify those elements as the financial responsibility of those members, the association is required to create a separate proposed budget that estimates revenue and expense for those limited common elements. That budget should identify the amount of the additional maintenance assessment for those members and will appear as an attachment to the basic budget. ● Operating capital : Monies paid to the association at the time a unit is conveyed from one member to another. ● Operating budget : Typically identifies routine, regularly occurring, expenses of the association. It effectively functions as the association’s annual financial plan. ● Reserve schedule : Is based on a schedule attached to the budget that estimates expenses for capital expenditures and deferred maintenance over a multi-year, long-term period. The reserve section functions as the long-term financial plan of the association. The reserve appears on the budget as a single account or line item that shows the cost of funding the reserve for the next fiscal year. ● Revenue : The amount of money that a company receives during a specific period. ● Special assessment : An assessment for a non-budgeted, sometimes unanticipated, repair or replacement where operating and/or reserve funds are not available. There are times that the association knows in advance that it will need additional funds and chooses to special assess rather than raise regular assessments.
in damage to common elements or unit components). If the association has funds available in its operating budget, it has the authority to use those funds to pay for such expenses.
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