Though your mortgage payment shows up on your bank statement as one consolidated payment, it actually has different components that have different accounting treatment. You need to make sure you account for these properly, otherwise your financial reports and your taxes won’t be done properly.
The components of your mortgage payment
Your mortgage payment consistent of the following:
- Principal: This is the amount that goes towards paying down your mortgage balance. Mortgage principal will affect your balance sheet and cash flow, but not your P&L nor your tax liability.
- Interest: This is the amount of monthly interest you’re paying for your loan. This amount affects your P&L and your Schedule E.
- Escrow (maybe): If you are paying insurance, taxes, and/or mortgage insurance via escrow, you may also have an escrow amount on your mortgage statement. You’ll pay monthly into escrow, and then your servicer will pay your taxes and insurance as they come due.
How do I enter these into Azibo?
Here are two ways you can enter these into Azibo, each with their pros and cons:
- (Best) Split each monthly payment
This is the best way, but also takes the most effort. Every month, split your mortgage payment into principal, interest, and (if applicable) escrow, based on the monthly mortgage statement.
Pros: You will have accurate monthly and annual financial reports and taxes.
Cons: Monthly you have to go in and split the payments as per your monthly mortgage statements.
- Book them into “Mortgage Payments (unallocated)” and adjust as one lump sum at the end of the year
You can set up a rule to automatically book your mortgage payments to the “Mortgage Payments (unallocated)” category. This will accrue your mortgage payments to a holding account, “Mortgage Payments (unallocated)” in the Long Term Liabilities section of your balance sheet.
Then made a journal entry adjustment at the end of the year. You can use your form 1098 to journal in an adjustment as of 12/31/YYYY.
In Azibo, go to Bookkeeping, click “Add” at the top right, and select journal entry. Make the following entry:
- Debit: Mortgage Principal for the total amount of principal paid in the year
- Debit: Mortgage Interest for the total amount of interest paid in the year
- (if applicable) Debit: Escrow for the total amount of money paid into escrow that year
- Credit: Mortgage Payments Unallocated for the total
Pros: You can automate your monthly bookkeeping for mortgage payments. Your monthly cash flow reports will be accurate. Your yearly financial reports and taxes will be accurate.
Cons: Your monthly P&L and Balance Sheet will not be accurate.
- Book them into “Mortgage Payments (unallocated)” and adjust each payment at the end of the year.
As per #2 above, set up a rule to automatically book your mortgage payments to the “Mortgage Payments (unallocated) category”.
Then, at the end of the year, instead of doing one big journal entry, do a bulk edit to split each of your mortgage payments in one go.
Use the filters to filter for “Mortgage Payments (unallocated)” for a specific property. Select each of these transactions, and then click on bulk edit. In the side panel, click on split. Do a bulk split for the following:
- Mortgage Principal: The average monthly mortgage principal payment
- Mortgage Interest: The average monthly mortgage interest payment
- (if applicable: Escrow: The average monthly contribution to escrow
Pros: You can automate your monthly bookkeeping for mortgage payments. Your monthly cash flow reports will be accurate. Your yearly financial reports and taxes will be accurate. Your monthly P&L and Balance Sheets will be slightly inaccurate, but a close approximation to reality, especially if you are on a 30 year mortgage.
Cons: Your monthly P&L and Balance Sheet will not be 100% accurate. During the year, your monthly P&L and Balance Sheet will be fairly inaccurate as you are waiting until the end of the year to do an adjustment.
How do I account for expenses paid via escrow?
Since your mortgage servicer is paying expenses on your behalf, you won’t see these expenses hit your bank account. As such, you will need to create journal entries for when your servicer pays your expenses for which you’re paying into escrow (property insurance, taxes, and/or mortgage insurance).
In Azibo, go to Bookkeeping, click “Add” at the top right, and select journal entry. Make the following entry:
- Debit: The applicable expense category (Property Insurance, Property Taxes, Private Mortgage Insurance etc)
- Credit: Escrow
Do this for each of the expenses.
Note - as a future enhancement, Azibo will be creating mortgage schedules to automate this for you.