Reset up of accounts and mortgage

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SML
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Joined: Wed Apr 22, 2009 4:29 pm

Reset up of accounts and mortgage

Post by SML »

Hello,
I have had this job for 2 years and the folks who initially set us up on PCP were to their own admission not accounting saavy. While I am no CPA there are several things that do not tie to eachother - specifically many transactions done in the operating budget do not carry over to the balance sheet so our balance sheet is just incorrect.

I spoke to technical support and they agreed that although not ideal the best way is to treat the past as the past and reset up under a whole new fund. Our FY starts July 1 so the reality is we will have to look at our historical info under one fund and FY09-10 and going forward under the new fund.
So basically it will be as if we are starting out as new users of PCP. My questions are:

How do I set up our existing mortgage loan and what is the proper accounting when we make payments to it? The outstanding loan amount was put in under LT liability but the principal was never updated/tied to when we made a payment. So up until now it has been an expense only account. So for example, our total loan outstanding is about 300,000. We pay about $24000 a year in total P&I payments. Until now we have shown an expense budget amount of $24,000 (acct 5610) with $2000 payment each month. But the loan amount was never reduced as we made a payment each month. What is the proper way to do this?

Also, do I need to show only the interest as annual operating expense and the principal is carried on the liability account only? I am wondering if we have had "too much" shown in the annual budget when all we needed was the interest portion as operating expense.

Thanks.
Hope this is clear.
Suzanne

JohnDMeyers
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Re: Reset up of accounts and mortgage

Post by JohnDMeyers »

(Substitute your own account numbers according to your chart of accounts)

(corrected on 1-7-11 for more general use - JohnDMeyers)


To set the Mortgage outstanding principle balance:
DB 01-1110-000 Checking (or savings) $285,000
CR 01-2016-000 Mortgage (Long term liability) $285,000

Enter the value (purchase price or market value) of the $350,000 ($285,000 cash, and the rest in market value) building asset:
DB 01-1610-000 Building Asset $350,000
CR 01-1110-000 Checking (or savings) $285,000
CR 01-3110-000 Unrestricted Net Asset $65,000

To make a $2000 Mortgage payment with $1,300 toward interest and $700 toward principle:
CR 01-1110-000 Checking Account $2000
DB 01-2016-000 Mortgage liability $700
DB 01-5610-000 Mortgage Interest Expense $1,300

If you have a yearly mortgage payment schedule, you can budget the interest expense for 01-5610-000 off of that by adding up all the interest amounts for the year.

I set up an automatic payment in Accounts Payable / Maintain Auto-repeating entries with the amounts for the first payment of the year, and after releasing the payment in the current month, adjust the principle and interest amounts. That way, the accounts are already setup for you each time.
Last edited by JohnDMeyers on Fri Jan 07, 2011 6:55 am, edited 1 time in total.
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SML
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Joined: Wed Apr 22, 2009 4:29 pm

Re: Reset up of accounts and mortgage

Post by SML »

Thanks John. That is very helpful.
Sorry if this is a basic question around your answer but we build our budget directly around our stewardship and show people how much we need to spend. If our mortgage payment (P&I) is accounted for by part going to "budget operating expense" and part going to liability, how do you show this to your congregation in an annual budget? If our interest portion was $1500 it seems like we would show 12 months of that in the operating budget ($18000) but then we still need the other $500 in pledge income to cover the principal. Do you get both the operating budget and some other amount on items that are "balance sheet only" approved each year?
Thanks!
Suzanne
773-549-0260 ext 10

JohnDMeyers
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Re: Reset up of accounts and mortgage

Post by JohnDMeyers »

Suzanne:

This gets into the "sources and uses of cash" (or cash flow) financial statement where there is no single standard report that gives the definitive answer. The cash management report with the assets and liabilities de-selected is pretty close, but it omits the very thing you are looking for, a change in assets.

The Cash Management report with assets and liabilities selected is more like a "net worth" report than it is a cash-flow report.

So, in order to construct a "true" budget, I still do it manually. You have all of the expenses, that's pretty straight forward. You have to look for changes in assets. That is, take the end-of-year balance sheet and compare it to the beginning-of-year balance sheet and see what has changed. Then see if the changes are a direct result of a cash out-flow. Paying down a mortgage is one example (a change in a liability). Increasing a building asset (a change in an asset) because of improvements is another. Things like that. These are "uses of cash" but not "expenses", in accounting terms, that is.

PowerChurch now allows you to budget on Assets and Liabilities, by the way.

Also, if you show depreciation, add it back in. This is an "expense" that is not a "use of cash", It is simply a book entry.

You may have transfers to another account, as well, that may be a budgeted "expense".

I'm thinking there is one more thing to look for, but I can't remember it. If I do, I'll pop back on and let you know.
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Jeff
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Re: Reset up of accounts and mortgage

Post by Jeff »

This is what we have seen some churches do. When they write the mortgage payment they credit bank debit a mortgage expense. Then they make an adjustment to debit the mortgage liability and credit the unrestricted equity account.

This is not technically 100 percent correct accounting as it does overstate expense, but it does keep from having to explain why all cash outflows are not expenses and keeps the budget reports easier to understand.

Ron
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Re: Reset up of accounts and mortgage

Post by Ron »

Jeff wrote:This is what we have seen some churches do. When they write the mortgage payment they credit bank debit a mortgage expense. Then they make an adjustment to debit the mortgage liability and credit the unrestricted equity account.

This is not technically 100 percent correct accounting as it does overstate expense, but it does keep from having to explain why all cash outflows are not expenses and keeps the budget reports easier to understand.
Wondering if someone could clarify this entry on this old thread?
Is the following what is being said?
Let mort payment = $1400, and principal = $500; then
CR 01-1110 ckng $1400
DB 01-5615 mort expense $1400
DB 01-2620 mort liability $500
CR 01-3110 unrestricted net assets $500

Thanks much
Ron

Jeff
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Re: Reset up of accounts and mortgage

Post by Jeff »

You have it right.

Understand that this is not technically correct accounting. An accountant would say you have overstated your expenses, because a reduction in the amount you owe (liability) is not an expense. But church members will understand this easier and it shows better for the budget.

Ron
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Re: Reset up of accounts and mortgage

Post by Ron »

Understand.
At this time, communication with the congregation shall take the higher ground.

Thanks Jeff
Ron

ncmcctreasurer
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Re: Reset up of accounts and mortgage

Post by ncmcctreasurer »

That's great, but...how would we record changes in the Building Equity (Non restricted assets) without overstating Expenses?

When and how would you record the
01-3110-000 PPE Building Property Cr = amount of Principal payment/s
What balances on the Dr side if you don't overstate income by recording
01-5260-000 Mortgage Principal Expense for the Debit?

Thanks!

NeilZ
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Re: Reset up of accounts and mortgage

Post by NeilZ »

ncmcctreasurer wrote:
Mon Jan 31, 2022 12:22 pm
That's great, but...how would we record changes in the Building Equity (Non restricted assets) without overstating Expenses?

When and how would you record the
01-3110-000 PPE Building Property Cr = amount of Principal payment/s
What balances on the Dr side if you don't overstate income by recording
01-5260-000 Mortgage Principal Expense for the Debit?

Thanks!
Replying to an 8 year old topic is never a good idea as it is often overlooked, and is a tactic of spammers who try to legitimize their post.

That said, could you start a new topic and explain exactly how are you entering the load payment, and what you're using for the various accounts, especially the net assets account as 3110-000 is usually the default unrestricted net assets account in Powerchurch.
Neil Zampella

Using PC+ since 1999.

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