and now we're going to learn about how to record making mortgage payments what does each monthly
mortgage payment have well each payment has a small amount for interest expense which is
the service fee that the bank keeps because they loan you money for the mortgage it has
an amount that decreases the principal balance and that amount is going to be different for
each monthly payment and of course very often mortgage payments also include something called
escrow which is a mix of the mandatory real estate taxes and mandatory insurance that
the bank requires that you keep during the life of the mortgage now we already put this account
in our chart of accounts the principle we already have a long term liability in our
chart of accounts that we put in an earlier video and that reflects the current balance
what we have not yet put is interest expense and escrow in our chart of accounts and we
will put them both as an expense from the main menu click list chart of accounts in the bottom
left click account new now these will both be expenses one will be interest expense
save and new now the other expense will be escrow and you might want to also mention
some more details about which one it is okay save and close and now we have the accounts on
our list and were able to start making mortgage payments how do you know how much of each payment
goes to each of the parts that we talked about well there's two ways the bank will give you a
payment schedule so you will always know which payment has which amounts or you could use the
QuickBooks loan manager which will be discussed in the following videos for example let's imagine on
November 1 we made payment number 1 for $500 now all of the payments will be $500 however
let's imagine that every single payment has $100 escrow for the insurance and the taxes
but this particular payment payment number 1 the interest will be $100 and 300 of this
payment will be a balance reduction reducing the principal so how do you record this in one
payment you do what we call a split check and it's very very easy before we make the payment
we look at the trial balance and you can see that the mortgage to mike was still is still $70,000
and we have ninety two thousand nine hundred twenty dollars in the bank and right now we
don't have any interest expense or escrow on the trial balance even though we put it in the chart
of accounts but these numbers will change accordingly when we enter this information
for this first payment so we open the check window and we put the date November 1st of 2020
now the person who we pay is Mike the mortgage guy Mike's mighty Mike's real estate now the amount
that we're paying is five hundred and we push tab now QuickBooks tries to help us by remembering the
most recent account associated with this vendor it does not know what's happening it's just trying to
make a suggestion we will not leave this as five hundred dollars and we will not leave this as
the building first the escrow account the escrow which I believe is here we already said a hundred
out of the five hundred push tab a hundred out of the five hundred out of this $500 total payment
a hundred dollars goes to the escrow we also said expense which is interest expense in this
particular payment payment number one the interest is a hundred dollars and therefore the remaining
three hundred decreases what we owe so we go to the long-term liability account here so this is
what's called a split check the total we're paying is on top and that's what's coming out of the bank
account that you chose a hundred of that goes to this expense escrow another hundred goes to this
expense interest and the remainder decreases the long-term liability when we click Save and
close we look at the trial balance and we see the mortgage to Mike is no longer seventy thousand it
is now sixty nine thousand seven hundred you now notice you have five hundred dollars less
in the bank as a result and for the very first time interest expense showed up for $100 and
the escrow showed up for a hundred dollars now we must do a second example to get the whole
picture let's imagine December 1 we made payment number two again for five hundred dollars again
the hundred dollars in escrow will be the same for each payment however the bank schedule that they
gave us for this mortgage tells us that in payment number two the interest amount is only $95 and the
amount the principle is reduced in payment number two is three hundred and five dollars and this is
exactly the way we split the check we click check from up here and again it's December one n it's
still mighty Mikes mortgages whom we're paying and was still paying five hundred dollars now
we know that the escrow amount is still going to be a hundred dollars so we might as well put
that first but this time the amount of interest expense is only ninety five dollars because it's
the second payment and the interest goes down each payment and that means the mortgage reduction the
principal decrease of this long term liability is now three hundred and five dollars so QuickBooks
knows this has to add up to the total payment on top and if you ask why does the interest go down
each month and why does the principal reduction go up each month for that you can simply watch the
following videos and it will explain all about how mortgages work for now just click Save and close
and take a look now the balance of the mortgage is even more decreased and the interest expense
is even higher because we had two months worth of interest and of course the bank account decreased
even more and that's how we do it if you look at the loan balance right now what is it mortgage -
Mike it's now down to 69 thousand three hundred ninety five which means if we wanted to pay off
the mortgage after the December one payment this would be the amount we would have to pay