Managing your mortgage payments effectively is crucial for maintaining accurate financial records. In this help article, we’ll walk you through how to record both the initial mortgage loan and the subsequent monthly payments using journal entries. By the end, you’ll be able to track your mortgage’s principal balance and the interest expenses accurately.
Scenario:
You have a mortgage with TD bank of $400000. Every month you are paying the mortgage amount of $2500 which includes principal($1300) and interest($1200).
Step 1: Recording the Initial Mortgage Loan
When you take out a mortgage, the amount borrowed (in this example, $400,000) should be recorded as a liability in your accounting software. Simultaneously, your bank balance should increase by the same amount. Here’s how you can create this transaction:
Journal Entry for Initial Mortgage Loan:
| Date | Account | Debit | Credit |
|---|---|---|---|
| YYYY-MM-DD | Bank Account (TD Bank Checking) | $400,000 | |
| YYYY-MM-DD | Mortgage Payable (TD Bank) | $400,000 |
Explanation:
- Debit: The Bank Account increases by $400,000, reflecting the amount received from the mortgage.
- Credit: The Mortgage Payable account increases, representing your obligation to pay back the $400,000 loan.
Step 2: Recording a Monthly Mortgage Payment
Every month, you make a mortgage payment, which usually consists of two parts: principal and interest. In this example, your monthly payment is $2,500, where $1,300 goes towards reducing the mortgage principal, and $1,200 is for interest.
Journal Entry for Monthly Payment:
| Date | Account | Debit | Credit |
|---|---|---|---|
| YYYY-MM-DD | Mortgage Payable (TD Bank) | $1,300 | |
| YYYY-MM-DD | Interest Expense (Mortgage) | $1,200 | |
| YYYY-MM-DD | Bank Account (TD Bank Checking) | $2,500 |
Explanation:
- Debit: The Mortgage Payable account is debited by $1,300 to reduce the principal balance.
- Debit: The Interest Expense account is debited by $1,200 to record the cost of interest for the month.
- Credit: The Bank Account is credited by $2,500, reflecting the total amount of cash paid out for the mortgage.
Step 3: Repeat for Every Monthly Payment
Each month, you’ll repeat the journal entry for the mortgage payment, adjusting the principal and interest amounts according to your mortgage schedule. This will keep your liability account and interest expenses up to date.
Additional Tips:
- Automate Recurring Payments: Consider automating the monthly mortgage payment transactions. This will ensure your records stay updated without manual entry each time.
- Monitor Principal Balance: By regularly recording the principal payments, you’ll be able to track how much of the mortgage has been paid off and how much is still outstanding.
- Review Interest Expenses: Over time, your interest portion may decrease as more of the payment goes towards the principal.
Sample Transactions Summary:
- Mortgage Loan Entry:
- Debit: Bank Account – $400,000
- Credit: Mortgage Payable – $400,000
- Monthly Payment Entry:
- Debit: Mortgage Payable – $1,300
- Debit: Interest Expense – $1,200
- Credit: Bank Account – $2,500
By following this guide, you’ll be able to maintain accurate records of your mortgage and ensure both principal and interest are accounted for correctly.
If you need more assistance on setting up your chart of accounts Click Here.