Finance Flash: Why Does an Expense Appear Before It Is Paid?

Have you ever reviewed the Association’s financial statements and noticed an expense recorded in one month, even though the invoice was not paid until the following month?

That is accrual accounting at work.

Under accrual accounting, revenue and expenses are generally recorded when they are earned or incurred—not simply when money enters or leaves the Association’s bank account. This approach helps each financial period reflect the activity that actually occurred during that time.

How Does Accrual Accounting Work?

Imagine the Association receives landscaping services throughout August, but the vendor does not submit the $10,000 invoice until September.

Because the landscaping services were performed in August, the expense belongs to August. Finance may therefore record an accrued expense to reflect the cost in the correct month:

• August: The $10,000 landscaping expense is recognized.
• September: The invoice is received and paid.

Although the cash leaves the Association’s bank account in September, the financial statements show the expense in August because that is when the service was provided.

How Is This Different From Cash Accounting?

Under cash accounting, transactions are recorded only when money is received or paid. In the landscaping example, the entire expense would appear in September because that is when the payment occurred.

Accrual accounting provides additional context by separating two important events:

• When the Association incurred the expense
• When the Association paid the expense

This distinction provides a clearer picture of the Association’s financial activity during each reporting period.

Revenue Is Recorded Similarly

Revenue may also be recognized before the corresponding payment is received.

For example, if an owner’s assessment becomes due on January 1 but has not yet been paid, the Association may recognize the assessment revenue when it is earned and due. The unpaid balance would remain recorded as an account receivable until payment is received.

This allows the financial statements to distinguish between:

• Revenue the Association has earned
• Cash the Association has collected

Why Does Timing Matter?

Accrual accounting gives the Board and management a more complete and accurate view of the Association’s financial performance for a specific period.

Without accruals, monthly results could be distorted by the timing of invoices and payments. If several invoices for August services were not received until September, August might appear artificially under budget while September appeared significantly over budget—even though the services were performed as planned.

Recording financial activity in the appropriate period helps:

• Create more meaningful budget-to-actual comparisons
• Provide a clearer view of monthly operating costs
• Match expenses with the services received
• Match revenue with the period in which it was earned
• Support better-informed financial decisions

Understanding the Financial Statements

An accrued expense does not mean the Association paid an invoice twice or spent money before receiving a bill. It means the anticipated cost was recorded in the period when the service occurred. Once the invoice is received and processed, the accrual is reconciled so the expense is not duplicated.

Similarly, recognized revenue does not always mean the Association has already collected the corresponding cash. Unpaid amounts may remain listed as receivables until payment is received.

Finance Flash Takeaway

Cash tells us when money moved. Accrual accounting tells us when the financial activity occurred.

For an HOA, that distinction helps ensure each month’s financial statements accurately reflect the services received, expenses incurred, and revenue earned—even when the related cash moves during a different month.

Questions? We’re here to help! Reach out to our team any time at stoneb@ciramail.com.