Reduce Liabilities

[wmorgenstern]

We had a Mortgage on a house. We sold it, and we got some money back from the bank (due to overpayment).
How do I reduce the Liability to zero?
I know to reduce Liability is to put it under credit.
What should the debit be?
I have income accounts in the Chart of Accounts (where the overpayment went).
Where should the credit and debit go? Say the mortgage was 22,000.
I know I need to put 22,000 on the credit side of the liability, to reduce it to zero.
What is the on the debit side?
Thanks
Werner Morgenstern

[Jeff]

To reduce a liability, you debit it.

Question is did you have the house on your books as an asset?

With the folowing made up numbers
Amount left on mortgage 25,000
Original price of house 35,000
Sale price of house 37,000
Amount received from the bank 12,000

Typically the journal entry would look something like this.

Code: Select all

Account                   Debit     Credit
Bank                     12,000
Mortgage                 25,000
    House Asset                     35,000
    Gain on sale of house            2,000

If you have been recording depreciation then you have an additional account to worry about.

Same facts as above but with 5,000 of accumulated depreciation on the house.

Code: Select all

Account                   Debit     Credit
Bank                     12,000
Mortgage                 25,000
House accum depreciation  5,000
    House Asset                     35,000
    Gain on sale of house            7,000

I hope that helps. If you were not showing the house as an asset, then you have to make a different journal entry.

[wmorgenstern]

No, we did not have the house as an asset in Powerchurch.
We only had it as a liability.
We sold it through an agent, so we never really saw the money.
The house mortgage (outstanding was around 24,000), and we had to pay for additional stuff (like home insurance, etc).
We sold the house for 28,000, and we came around $2000 short, which we had to pay to the bank.
Then we got however $150 back from the bank for overpayment (which is in Powerchurch as income), and $500 from the agent who worked with us to sell the house, for Escrow Balance (which is also in Powerchurch as income).
So how exactly do the journal entries need to be?

Say the following chart of accounts:
001-2000 Liability - Home 22,000
001-4000 Income - Bank Overpayment $150.00
001-4001 Income - Escrow Balance from Agency 500.00

I need to reduce the 001-2000 Liability to 0, since we do not have the mortgage loan anymore.
And obviously the 2 income accounts need to transferred to the right account.

Thanks
Werner

[Jeff]

You have to remember the basic accounting equation is:

Assets - Liabilities = Fund Balance

Normally when you take out a loan, you increase a liability and increase an asset, the equation is still in balance. In this case you didn't have an asset, so you were really understating your fund balance. To remove the liability, I would then credit the fund balance account. To remove the liability in this case you would debit the liability and credit the fund balance.

As far as the income, I'm not sure what to tell you. Typically when you have a refund, you would go back against the orignal expense account and reduce the amount of expense rather than show additional income. Because really that is what is happening, you are getting money back because of an overpayment of an expense. I don't know if that money can be traced back to a particular expense or not. If it can't, it wouldn't be the end of the world to show it as income. The only thing that would happen is your total income and total expenses would be overstated slightly.