A mortgage is a loan to buy real estate, like a home, where the property is collateral. Borrowers make regular payments over many years, including the loan amount and interest. If these payments don't occur, the lender can take ownership of the property. The borrower must record the mortgage obligation as mortgage payable.
What is Mortgage Payable?
Mortgage payable refers to a long-term debt obligation that a company or individual owes to a financial institution or lender due to borrowing funds to purchase real estate, typically a home or property. It gets recorded as a liability on the balance sheet and represents the amount that needs to be repaid over an extended period, often with a fixed interest rate.
Individuals and businesses use mortgages to secure the funds necessary to purchase property without paying the full purchase price upfront. However, they usually make a down payment on the property while a financial institution funds the remaining portion. This portion gets funded with a mortgage the purchaser must repay over a defined period.
What is the accounting for Mortgage Payable?
Accounting for mortgage payable involves accurately recording the borrowing of funds for real estate acquisition and managing subsequent repayments over time. Initially, when a mortgage loan is obtained, the borrowed amount is recorded as a liability on the balance sheet, while the corresponding cash inflow is reflected. The borrower must separate the current and non-current portions of the mortgage payable obligation on the balance sheet.
As the loan term progresses, interest expenses are recognized based on the outstanding balance and interest rate. These expenses are spread over accounting periods. Mortgage payments consist of principal and interest components. As payments occur, the principal amount decreases. This reduction is recorded by adjusting the mortgage payable and cash accounts. An amortization schedule clarifies how each payment is allocated.
What is the journal entry for Mortgage Payable?
When a company or individual first obtains finance through a mortgage, they must record the total obligation as a liability on the balance sheet. The entry must reflect the acquisition of the underlying property and the down payment made. Typically, the initial journal entry looks as follows.
Dr Property (asset)
Cr Bank or cash (down payment)
Cr Mortgage payable
Over time, the borrower must reduce the mortgage payable balance. As mentioned above, this occurs through payments made to the lender. However, this payment includes a portion of interest and principal. Therefore, the borrower must segregate them since each item impacts a different financial statement.
Typically, a mortgage payment journal entry will look as follows.
| Dr | Interest (income statement) |
| Dr | Mortgage payable (principal portion) |
| Cr | Bank or cash |
Example
A company, Blue Co., acquires a building for $1 million. The company puts a down payment of $200,000 from its bank account, while the remaining portion gets financed by a bank. The initial journal entry to record this transaction for Blue Co. will be as follows.
| Dr | Building | $1,000,000 |
| Cr | Bank | $200,000 |
| Cr | Mortgage payable | $800,000 |
At the end of each month, Blue Co. gets charged $1,000 in its bank account for mortgage payments. Let's assume 10% of the payment relates to interest while the remaining amount covers the principal. A typical mortgage payment journal entry for Blue Co. looks as follows.
| Dr | Interest expense | $100 |
| Dr | Mortgage payable | $900 |
| Cr | Bank | $1,000 |
In practice, mortgage transactions are more complicated and subject to higher regulations. On top of that, mortgage payments don't have specific interest or principal portions. They follow an amortization schedule which defines the mix between the two portions related to interest and principal amount.
Conclusion
Mortgage payable represents a liability owed to a financial institution for a mortgage on a property. The accounting for this obligation initiates when a borrower acquires a property and funds it through a down payment and mortgage. This process also considers the subsequent payments made towards the mortgage payable balance.
Article Source Here: Mortgage Payable: Definition, Accounting Treatment, Journal Entry, Example
source https://harbourfronts.com/mortgage-payable/
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