The Difference between Condominium Accounting and Accounting for Companies

The biggest difference is that a condominium is a not for profit corporation. Generally accepted accounting principles continue to apply and all information is gathered on an accrual basis[i]. Because owners are only expecting to pay for the maintenance and reserve, there is no need for a profit. In any year where a surplus is created, it is not redistributed but used in the budgeting of the property in the following year.

In a private company the objective is to make a profit for the shareholders and therefore budgets usually include some planned extras for profits. This is not legal in a condominium, where living expenses collected from the residents should match the annual funding requirements.

The second biggest difference is that in condominiums there is a reserve fund for the repair and/or  replacement of worn out assets. The actual purchase price of the condominium included paying for the use of all the common elements as well, but the reserve fund must be maintained to pay for major repairs and/or replacements such as a new roof or repaving a parking area. In a for profit organization, the capital investment is recovered through profit and depreciation expenses. There is no depreciation (or usage) expense in condominium accounting.

In Ontario, the current Condominium Act states that the reserve account must be kept separate and segregated. Each year it must also include an infusion equal to or greater than 10% of the common element operating fees deposited on a monthly basis. Adequacy of the reserve fund is determined by a tri-annual reserve fund study conducted by a qualified reserve fund planner.

The Act also requires that the condominium corporation’s auditor provide a list of all reserve expenditures each and every year. In a “for profit corporation” prices are set and then adjusted according to the laws of supply and demand. In a condominium, fees are set by a vote of the condominium board who are elected by the condominium owners. Total monthly fees are expected to match the annual maintenance and reserve requirements. If in the previous year, there was a net loss or borrowing because of insufficient fees, it must be collected in the immediate  subsequent year. The basic business accounting principle in a condominium is user pay.

Condominiums are allowed to borrow money if there is a necessary major expenditure. This borrowing must be approved with a by-law and by a 66 and 2/3% majority of the owners and written into the corporation’s minutes before the loan is permitted. In a for profit organization, shareholders permission is not a written pre-requirement to borrow money.

All condominium owners are entitled to financial statements. Condominium corporations with common element fees exceeding total annual fees of $75,000 must be audited every year.

This article has been provided as an information item for condominium boards and property managers as a public service by Condo Services Agency.

[i] Accrual accounting is the principle of matching revenues and expenses to the period in which they are incurred as compared to cash accounting , where the recording of the information matches he actual flow of cash.