Accounts - Cost Center Overview
Cost Centers are departments or other units within an organization to which costs may be charged for Accounting purposes. With Cost Centers, one quickly finds there are no strict rules or laws that clearly define how cost centers must work. There are only principles and guidelines for tracking the financial activity of a unit within a community.
Different Cost Center Cases
Master-Sub Associations- In this case there is a Master Association that all homes in the community are part of and have to pay an assessment to.
Section Accounting- This is a variation of the Master Sub-Association except that there are NO Sub-Associations, there are just “sections” that perhaps have different styles of homes requiring different levels of service from the HOA.
This article will shed light on the different ways that cost centers can be used. There is no one right way to use them and every community is different. There are two main methods of how cost centers can be used. First and most common is Section Cost Center Accounting.
Section Cost Center Accounting – A section, segment, building, neighborhood, phase, or another unit of a community is assigned a Cost Center for the purpose of financial tracking. Any financial transactions regarding a particular section are charged to that section’s cost center. In this method, the section is represented by the cost center.
The other method of Cost Center Accounting revolves around using the cost centers to roll-up to the main account, hence the name Roll-up Cost Center Accounting. This is an alternative method of using cost centers. In this method, the item is represented by the main account
Roll-up Cost Center Accounting – Often referred to as project accounting, is used to consolidate financial transactions regarding a particular project or item. This can be used in regards to Reserves or for consolidating income and/or expenses for an item.
Tracking Income and Receivables by Cost Center
If you need to track income and receivables by cost center for a section of properties “Use Property Cost Center” needs to be active for both the income account and receivable accounts.
Tracking Cash Receipts
This is one of the more complicated portions of full cost center accounting. Since cash deposits generally are received into one bank account the deposit is also made to one GL account. The deposit entry will use one GL cash account and multiple cost center receivable accounts. A transfer is needed to move the monies from the master bank account into the cost center bank accounts. The use of recurring payable or recurring journal entries is available to expedite this process.
Tracking Expenses by Cost Center
Tracking the expenses is similar to the cash receipts when using accrual accounting. While the only setup steps that need to be done is to add the cost center to the expense account types. Then when adding bills just code the bills to the proper cost center.
Tracking Accounts Payable by Cost Center
At the end of the accounting period, any open payable items need to be re-classed to the proper liability cost center. This can be aided by the use of the re-curing journal entries. The re-class of the open payables (Liabilities) is only applicable to accrual accounting.
In this case, there is a Master Association that all homes in the community are part of and have to pay an assessment to. But there are also Sub-Associations under the Master where each home is in its own legally formed Association and has to pay an assessment to the Sub Association also. For example, there might be HOA’s Subs with single family homes or townhouses and then other Subs that are Condos all under the larger umbrella of the Master Association.
The Sub Association typically takes care of the services for its resident members like lawn care, street lighting, playgrounds, etc used by the members of that Sub Association. The Master is responsible for general common areas like the community entranceway, clubhouse, pools, etc. Collections of both the Master and Sub-Association assessments are usually made at the Master Association level and kept separate using a combination of separate Charge Tables and Cost Centers to split out the assessment revenue. Although it is also common for the accounting and assessment collections to be done at the Sub-Association level and the monies collected for the Master to be paid by check to the Master. Again, Charge Tables and Cost Centers are used in this scenario as well to keep the income belonging to each entity separately accounted for.
Using Cost Centers, Balance Sheet and Income/Expense Statements could be rendered by Cost Center for the Master as well as each Sub-Association. Likewise, customers would want the ability to filter the AR and AP reports based on a selected Cost Center.
This is a variation of the Master Sub-Association except that there are NO Sub-Associations, there are just “sections” that perhaps have different styles of homes requiring different levels of service from the HOA. For example, there could be a section of “Patio Homes” (townhouses) where the HOA is responsible for cutting the grass. They would pay a higher assessment than a single family section where each homeowner is responsible for cutting their own grass. Using Cost Centers would give the visibility of the income vs the expenses for each section so that homeowners from the single-family sections would know they are not subsidizing the expenses for the higher service levels needed by the Patio Homes section.
Using Cost Centers, the HOA could pull Income/Expense Statements for each Cost Center showing the revenue vs the expenses for each section to justify that their assessment levels are covering their expenses.