The liability of an owner to pay the fixed loan that is acquired by a company within the timeline is known as mortgage payable.
As there are different types of liabilities i.e., the short-term liability and the long-term liability. Similarly, mortgage payable is considered a long-term liability.
Accounting for mortgage payable is made in the balance sheet of a company. Proper journal entries are made to show the changes that occur.
We’ve shared the complete procedure of making journal entries to show the accounting for mortgage payables.
But, before that….
What does accounting for Mortgage Payable Mean?
The Mortgage Loan Payable means a significant amount owed on a home loan credit. (Any premium that has gathered since the last installment ought to be accounted for as Interest Payable, a current risk. Future interest isn’t accounted for on the financial statement.)
Any principal that will be paid within a year of the balance sheet record date is accounted for as a current liability. The remaining amount of the mortgage loan is accounted for as a long-term liability (not a current liability).
How are Journal Entries of Accounting for Mortgage Payable Made?
Wouldn’t it be great to see some journal entries created for the accounting for mortgage payables? See some of the journal entries below to understand how journal entries of accounting for mortgage payables are made:
Consider an example to make a journal entry.
An XYZ Ltd. company signs a mortgage loan agreement with a bank to borrow $150,000 for 12 years with an interest of 3% per year. In this way, the company will need to make an annual payment of $15,000 each year.
We’ve shown the journal entry for the mortgage payable on the first day of receiving the loan and the first payment of installment.
With the mortgage loan information in the above example, the company can have the payment schedule as below:
|Years||Loan Outstanding||Total Payment||Interest Payment||Principal Payment|
On the day that the company obtains the mortgage loan, it will make the mortgage payable journal entry as below:
In this journal entry, the company’s liabilities increase by $150,000 together with the total assets in the same amount.
On the installment’s first pay, the company makes the journal entry for two essentials: the interest expense and the reduction of mortgage payable. It is shown below:
The total payment of $15,000 is for both principal and interest of mortgage payable. Likewise, in this journal entry, the mortgage liability in the balance sheet decreases (debit) by $10,500 while the expense in the income statement increases (debit) by $4,500 for the interest on mortgage payments.
Advantages and Disadvantages of Mortgage Payable
There are several advantages and disadvantages of mortgage payable. Let’s have a look at both of them.
Advantages of Mortgage Payable:
The four main advantages of mortgage payables are:
1. Capital additions
A significant capital increase can be made when purchasing a business property. This can be a decent method of acknowledging capital development growth over an extensive stretch as (long time) property costs consistently rise.
2. Financial Planning
Business property mortgage prepares extended installment plans that can be stretched for up to several years. This helps the business to focus on other significant business matters like deals, observing overheads and preparing staff.
3. Lower loan fees
Business property mortgages commonly have lower loan costs than other borrowed payments. Deciding to have fixed month-to-month reimbursements implies you can precisely utilize them in your business arranging and gauging. This further empowers you to structure the financial plans of your business with somewhat more conviction.
4. Leasing potential
If you have any extra space in or on the property you own, you can adapt it by leasing the excess space to produce extra pay.
Disadvantages of Mortgage Payable:
The four main disadvantages of mortgage payable are as under
The deposit you need could be significant. Not exclusively can a heavy deposit be daunting to raise; this is cash that might be better utilized in different pieces of your association.
2. Maintenance of the Property
All support, security, and the overall upkeep of your premises should be paid for and attempted by you, there will be no returning to the property manager.
3. Decreased Property Costs
There are consistent changes in property costs and in some cases these present moment slumps can influence the worth of your property which can result in diminished capital, influencing your funds and future earning ability.
4. Your loan fee
If you end up having a variable rate loan, any ascent in loan fees will bring about your month-to-month reimbursements turning out to be more costly. In this way, you will be dependent upon the bank in terms of the base rate and choices.
In this article, we’ve explained why a liability of an owner to pay the loan is known as mortgage payable. There are both benefits and disadvantages of mortgage payables. So, it’s better to take a closer view of both of them for understanding this accounting term appropriately.
When we talk of accounting for something, it means that we’re considering its journal entries. So, to help you understand and make the right decisions, we’ve discussed everything ranging from definitions, and examples to journal entries for mortgage payments.