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Mortgage Escrow Account: How to Properly Set It Up In QuickBooks - YouTube

Channel: STRATAFOLIO

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hi Amy I want to talk today about what

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happens if you record your mortgage

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payment incorrectly if mortgage payments

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aren't recorded correctly your financial

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statements are not accurate you're not

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able to make good decisions on your

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business based on the reports you're

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seeing and your CPA is going to spend

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more time which will cost you more money

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to keep your taxes prepared and your

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QuickBooks or software cleaned up okay

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well I think this is a great topic and

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when we talked about it I felt like this

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was something our readers can definitely

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benefit from so today Amy Heinen for

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quick action accounting and I are going

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to talk about three main things what an

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escrow account is how to record mortgage

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payments when you have an escrow account

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and if you do it wrong what happens and

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then we'll do a little summary at the

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end so why don't we begin with what is

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an escrow account the escrow account is

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like a holding account that your

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mortgage company has of your funds you

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pay into it each month when you make

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your mortgage payment and they hold that

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money until you need to pay your taxes

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on the property or insurance mm-hmm okay

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well why don't we just get started then

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let's show everyone how do you record a

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mortgage payment when you have an escrow

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account okay in QuickBooks I have a

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company here that has set everything up

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correctly they in their chart of

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accounts they have set up the escrow

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account as a bank account the reason you

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set the escrow account up as an asset in

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your QuickBooks is it's a bank account

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basically it's money that is that you're

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use to pay for expenses that you are

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generating revenue from okay so we have

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escrow account setup as a bank account

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and assuming the company is in the

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process of acquiring more properties we

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set up a sub-account for just this

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property

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Hunters Creek escrow and then they have

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their fixed assets and when they

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purchased it set up so if we look under

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the vendors and how they record this

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loan payment throughout the year the

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mortgage payment split into three parts

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it has the principal amount that is

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applied to the loan balance the interest

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expense which is an expense to the

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business and then the escrow account

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which is the money held to use for

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property taxes and insurance okay so on

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this particular entry we split it

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according to the statement I'll bring up

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this is a statement that applies for

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this mortgage and this property and as

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you can see on this statement it's broke

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out right here for the last payment how

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the principal interest and escrow is

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split so back in QuickBooks if we were

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to record that November payment start

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with a new one out of the checking the

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loan payment amount total is eight

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seventy one thousand and then on the

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statement right here it shows that the

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principal amount 166 thirty-two the

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interest amount was for $34.99 and the

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escrow going into that holding account

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is 270 oh six so we'll just enter that

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split so we recorded the amounts and

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split it up according to that statement

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mm-hmm at the time that this loan

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payment actually came out of the

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checking you wouldn't have had this

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statement yet mm-hmm so what I usually

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do is just record it with the last break

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out and then once I get the statement I

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go in and edit

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transaction to be accurate because I

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what's what's changing is the amount of

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principle being paid right the principal

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and interest split changes as the

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principal goes down the other thing that

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might have happened is if the property

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taxes were paid out of the escrow you

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would see that on the statement okay the

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point of making this split is so that

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your QuickBooks will match now if we go

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back to our chart of accounts and we

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look at our loan balance for this

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property all right ending balance after

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recording that payment is one hundred

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and six thousand nine hundred nine and

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four cents if we look if we look back at

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the statement it shows right up here

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your current loan principal balance and

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that matches mm-hmm as well it shows you

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on the statements your current escrow

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balance of one thousand twenty six

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dollars and thirty-five cents

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and if I look here we match once again

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our escrow okay so that helps us know

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how much is in there for the next

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property tax or insurance payment that

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might come out of it so you have a very

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clear visual of what's really going on

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with each asset that you have when you

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are recording it correctly

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that's correct then you're able to run

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in your reports whether the company and

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financial reports you can look at a

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profit and loss by job which will show

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you all of the income and expenses

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related to that property mm-hmm and you

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can see that the interest expense for

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the year will match it will match the

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statement total interest paid okay

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48 21 49 so earlier in the year property

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taxes were paid out of the escrow

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account now we were putting that money

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in what

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is a checking account in our chart of

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accounts for the escrow we can open that

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check register up and see that each

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month the payment goes in back in March

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the property taxes that were due were

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paid out yeah and this just came out of

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the escrow checking balance versus your

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checking account okay and then it

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happens again in September which is how

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we keep that escrow account in line mmm

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so your picture you're right is very

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accurate as you look over your reports

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and your balances of your accounts okay

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now let's show an example of a company

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that did not record it correctly you've

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seen many of those you can imagine if

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there were ten different properties how

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keeping this straight it's much easier

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if you're doing it as you go versus at

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the end of the year trying to straighten

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it all out what if a mortgage was sold

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between lenders mmm-hmm and then all of

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the year that's a nightmare for the CPA

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to get straight yes I feel your pain

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okay not so real estate company and like

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smart management that does not have an

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escrow account set up in their chart of

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accounts okay and when they're recording

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their loan payments throughout the year

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they're simply recording it to mortgage

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payments mortgage payments the CPA will

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ask and they'll look up that it's just

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an expense account so they're putting

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all three parts the escrow the interest

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and the loan payment into an expense

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account okay wrong right

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ami put together a nice comparison of a

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profit and loss statement between smart

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management and not so real estate

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company it nicely illustrates the impact

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of incorrectly recording mortgage

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payments for this particular statement

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the escrow payments changed during the

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year so to be able to back into the

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numbers here is a detailed breakdown of

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all the payments that were made which

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are then summarized in the yellow column

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and they might match the loan statement

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revenue is the same between the two

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companies the difference exists with the

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expenses as you can see smart management

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has their interest expense matching the

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statement from the bank and they have

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property taxes that were paid out of

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their escrow account they had a couple

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other expenses as well that were paid

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out of checking for some furnace repairs

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and insurance expenses over in not so

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real estate they have all of their

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mortgage payments that they made for the

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entire year sitting in their expense

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account and they have not recorded any

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property taxes for the year in the end

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they end up overstating their expenses

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which then understates their profit on

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this example that is a difference of

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over $1,900 that's a lot of money for

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just one property and this could mean

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that they are not prepared for their tax

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liability at the end of the year on the

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balance sheet if you look at smart

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management they have an escrow balance

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in their assets but not so real estate

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does not include an escrow balance which

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under states their total current assets

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by the amount of the missing escrow

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balance of approximately $1000 in the

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liability section you will see that not

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so real estate is not applying any of

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the payments from the loan to reduce

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their loan balance so they are

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overstating their liability all of these

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things that are wrong incorrect that are

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incorrect impact the bottom line ok Amy

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this has been awesome

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I have personally learned a lot

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from this so why don't we recap with

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just saying telling our viewers a key

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takeaways if you record your mortgage

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payment in crackling what happens with

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those incorrect transactions in your

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bookkeeping software you've thrown off

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your expenses most likely you're

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overstating your expenses you may have

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understated them and that throws off

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your bottom line you're not able to tie

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your balance sheet for the liability for

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the loan or mortgage with the bank

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statements or the escrow balance so your

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assets and liabilities are affected as

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well as your bottom line so if you are

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at that time in the area are preparing

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for taxes get it cleaned up you'll save

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yourself some money with your accountant

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definitely yeah okay thank you so much

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Amy for being here today to talk with us

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and as a reminder to our viewers this is

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Amy hi in for quick action accounting

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and we will share all of her contact

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information on the screen and I'm Jerry

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Frank and I'm CEO of strata folio you

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can find us on Twitter you can find us

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on Facebook Google+ and YouTube and we

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would very much appreciate any likes and

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subscribe to YouTube and if you have

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