Mortgage payable definition — AccountingTools (2024)

FAQs

Mortgage payable definition — AccountingTools? ›

Mortgage payable is the liability of a property owner to pay a loan. Essentially, mortgage payable is long-term financing used to purchase property. Mortgage payable is considered a long-term or noncurrent liability. Business owners typically have a mortgage payable account if they have business property loans.

Mortgage payable is a type of long-term debt that is used to finance the purchase of property or other assets. The borrower (also known as the mortgagor) agrees to make regular payments over a set period of time, typically with interest, until the loan is fully repaid.

These are written agreements in which the borrower obtains a specific amount of money from the lender and promises to pay back the amount owed, with interest, over or within a specified time period.

The long‐term financing used to purchase property is called a mortgage. The property itself serves as collateral for the mortgage until it is paid off. A mortgage usually requires equal payments, consisting of principal and interest, throughout its term.

For example, if your interest rate is 6 percent, you would divide 0.06 by 12 to get a monthly rate of 0.005. You would then multiply this number by the amount of your loan to calculate your loan payment. If your loan amount is $100,000, you would multiply $100,000 by 0.005 for a monthly payment of $500.

Recurring expenses are costs that occur on a regular basis. Examples of recurring expenses include rent or mortgage payments, office supplies, utilities, and insurance. You can deduct these expenses from your income on your taxes. In general, rent or mortgage payments come under the category of operating expenses.

When you bought the property, you acquired an asset, along with a liability — the mortgage. As you pay off the principal each month, you are transferring money from your checking account (an asset) to your loan account (a liability), but this would not be an expense on an income statement.

Example of a Mortgage Payable

The cost of the building is $500,000, and the company pays $100,000 as a down payment. This leaves a mortgage loan of $400,000. This mortgage loan is recorded on the company's balance sheet under long-term liabilities as a “Mortgage Payable” of $400,000.

A promissory note is a document between the lender and the borrower in which the borrower promises to pay back the lender, it is a separate contract from the mortgage. The mortgage is a legal document that ties or "secures" a piece of real estate to an obligation to repay money.

As Accounting Coach reports, a small business reports the mortgage as a line item called "mortgage payable" in the liabilities section of its balance sheet and reduces this amount as it pays down the balance.

What is mortgage on a balance sheet? ›

The mortgage debt used to purchase the building is recorded as a liability on the balance sheet concurrently with its recognition as an asset. The mortgage loan balance, including any accrued interest and related costs, is recorded as a long-term obligation.

No, loans are not current assets because they do not represent something that can be converted into cash within one year. They are instead classified as long-term liabilities or investments, both of which appear on the balance sheet as non-current assets.

Answer and Explanation: Mortgage Payable, being a liability account, would require a credit to the said account once it increases. Should there is a cash received, which usually happens, then it is needed to debit Cash for the amount received.

Debts with terms that go beyond a year, such as mortgages, are excluded from current liabilities and reported as long-term liabilities. However, the portion of the principal and accrued interest on long-term debts that is due to be paid within the current year is included in current liabilities.

One rule of thumb is that the cost of your home should not exceed three times your income. On a salary of $70k, that would be $210,000. This is only one way to estimate your budget, however, and it assumes that you don't have a lot of other debts.

Debts with terms that go beyond a year, such as mortgages, are excluded from current liabilities and reported as long-term liabilities. However, the portion of the principal and accrued interest on long-term debts that is due to be paid within the current year is included in current liabilities.

For example, let's say the mortgage is for a property valued at $250,000 and the remaining principal balance is $200,000. The journal entry for this mortgage would be: DEBIT the Property Fixed Asset account: $250,000. CREDIT the Mortgage Long Term Liability account: $200,000.