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Accounting Concepts and Principles


Basic Accounting Concepts for
Townhome, Condominium and other
Common Interest Developments

The fair and accurate reporting of the financial status and activities of the Homeowners association is the basis for accounting theory and practice. With the increasing size and complexity of Community Associations in California and the increasing economic role of government, the responsibility placed on the Association’s Treasurer and accountants for presenting fairly the results of the association’s business operations is greater today than ever before. Therefore, financial statements and other reports prepared by the treasurer or accountants are vital to the successful working of the Community Association.

The basic assumptions which underlie current accounting practice have evolved over the years in response to the needs of various users of the financial reports. Certain organizations, governmental agencies, and legislative acts have been extremely influential in shaping the development of the existing body of accounting theory.

The AICPA. The American Institute of Certified Public Accountants is the professional organization of the practicing Certified Public Accountant (CPA). As a professional organization, the Institute has been vitally concerned with developing standards of practice, both ethical and professional, of its members. The “Journal of Accountancy” has been published monthly since 1905 as a forum for practicing CPA’s. Beginning in the early 1930s the Institute, in concert with the newly created Securities and Exchange Commission, began to develop standards of sound financial reporting. During the 20 years from 1939 to 1959 the Institute published 51 Accounting Research Bulletins dealing with a wide variety of timely accounting problems.

In 1959 the Institute took the formal step of committing itself to a more comprehensive program of research into the problems of financial reporting. The Accounting Principles Board was formed with the responsibility of formulating and promulgating accounting principles related to financial reporting based on underlying research. The result has been the adoption of accounting procedures which purportedly conform to the basic principles of accounting and which minimize taxable income.


Accounting has frequently been called the “language of business.” This designation is applied to accounting because it is the method of communicating business information. Like other languages, it is undergoing continuous change in an attempt to discover better means of communicating.

The AICPA has defined accounting as follows: “the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof..”(AICPA Committee on Terminology, Accounting Terminology BuUetin No. 1, Review and Resume, p. 9).

The three steps of recording, classifying, and summarizing form the basic process by which accounting data are created. These procedures are carried out in accordance with a set of rules and conventions which have been developed over time. A thorough knowledge of the rules and standards is necessary for a complete understanding of the data and the manner in which they are accumulated.

The ultimate objective of accounting is the use of these data, through analysis and interpretation, as a basis for business decisions. Data derived from accounting records serve management in controlling current operations and planning future operations. Published financial statements afford homeowners and outsiders a means of analyzing and interpreting past operations of the association in which they have an interest. Accounting statements are for the most part reports of past events. The past however, is often the key to the future and for this reason accounting information is highly valued by decision makers both inside and outside the association. 
The Accounting Cycle

The accounting cycle is a complete sequence of accounting procedures which are repeated in the same order during each accounting period. The cycle includes:

  1. Recording transactions in the books of the association as journal entries
  2. Classifying data by posting he Journals to the ledger
  3. Summarizing data from the ledger on a trial balance
  4. Adjusting and correcting recorded data after due consideration of all pertinent facts
  5. Summarizing adjusted data in the form of financial statements
  6. Closing the books to summarize the activities of the period
  7. Reversing certain adjustments to facilitate the recording process subsequent periods

When these steps are completed, the cycle begins again for the next period.

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