P & L and Mortgage Payments

[Missy]

We received grant money that we track by coding them as a CLASS. We print monthly P & L statements to make sure we are using all of the grant money as specified.

We have recently taken a loan on a building. I set the loan up as a long term liability. The only way I can get the liability account to decrease (showing the loan is being paid down) is by putting the loan payment on the expense side of the check and the interest paid on the item side.

This works except the liability payment does not appear on the P & L, so the CLASS that makes the liability payment appears on the P & L as having a profit. There really is not a profit.

How do I get the mortgage payment to appear on the P & L?

[reuelt]

You really need at least two accounts to track a loan.

1. A long-term liability account
2. A expense account to track interest.

What I mean by at least is that the loan account may have two other sub accounts one for Amount-Borrowed and the other for Principal-repaid.

When it's time to make a payment on a loan, use the Write Cheques window to record a cheque to your lender.

1 From the Activities menu, choose Write Cheques.
2 Make a cheque out to your bank for the amount of the payment.
3 In the detail area of the cheque, assign the amount for interest to an interest expense account, and the amount for principal to the liability sub-account "principal-repaid" you created to track the loan.
4 Click OK to record the payment.

The main loan liability account will tell you how much you still owe, because the principal-repaid sub-account will have negative values while the Amount borrowed sub-account will be positive values.

Since the interest portion of the repayment goes to an Expense account, only that portion will appear in P&L.

The key is to split the loan repayment into what is for interest and what is for principal.

[Joey]

Classes don't have anything to do with your liabilities. If you're producing financial statements to show how your funds are being spent, you don't just run a P&L. That's for income and expenses. You must also run a Balance Sheet. That shows the assets and liabilities. This is the report that shows the loan being paid down. The interest expense is on the P & L and the Loan Balance is on the Balance Sheet.

[vintagerv]

reuelt,

Thanks for that explanation. Very helpful. Is there a benefit to breaking the Loan into sub-accounts for principal and repaid?

Thanks,
Steve

[Joey]

You don't need sub accounts. You just reduce the balance as you make the payments by charging the liability account with the principal portion of the payment.

[reuelt]

It is really a matter of preference.
I personally like sub-accounts in Quickbooks because they simply provide more information to me. In Quickbooks I can choose to hide or display up to any level of sub-accounts in my balance sheet.

Loans may not be static. If I increase ever my loan with the same bank/lender, I can simply add the new amount borrowed to the "Amount-Borrowed" sub-account.

If I do not use sub-accounts, the same information may be packed up from the transactions of a Loan Account.

Since I already have been using sub-accounts to track Tax-witholdings and Tax-Paid to the authorities, I prefer to use sub- accounts for consistency. The beauty of Quickbooks is that sub-accounts are always automatically summed to main accounts without human intervention.


Reuel