If you are an accountant, then the HBL cover letter accompanying the financial statement says it all: we use cash accounting except for dues and insurance.
For those of you who are not accountants, first an explanation of “cash accounting.” The annual financial statement shows all of the income and expenses for 2014. But which expenses are actually included as 2014 expenses? With cash accounting, any expense where the check was written in 2014 is considered a 2014 expense. For example, suppose you had work done in November 2013 and received the bill in December. If you paid the bill on December 31, 2013, then it is considered a 2013 expense. If you pay the bill on January 2, 2014, it is a 2014 expense.
We record incidental income in the same way but handle association dues differently. (That’s the “modified” part.) The Board plans expenses and savings for future major projects each year based on the expected association dues for the year. So we need to compare expenses and savings for the year to planned income for the year. And that’s what we do–we count all association dues for 2014 as 2014 income and ignore the fact that nearly half of those dues were actually received in December 2013. We also ignore the 2015 dues received in December 2014.
(The dues for 2015 that were paid in 2014 can be seen on the 2014 annual report if you look at the Fund Balance page. The line that says “prepaid homeowner dues” shows the dues received in December 2014 for 2015. The prepaid dues in the 2014 annual report will become dues income in the 2015 annual report.)
And that’s it. Expenses are recorded for the year in which they were paid. Dues income is recorded in the year the dues are for, regardless of the year in which they were received.