Loan Funds and Income

[SheilahH]

I have set up a construction loan following instructions found on this forum and it's working great. What is not working is that my income and expense report is showing such a large negative since I do not record the funding received from the construction loan as income but do expense funds paid out on the project. Am I doing that wrong or is the large negative just a fact of life until the loan converts? Thanks. Sheilah

[Jeff]

You will probably want to check with an accountant that can be familiar with what exactly you are trying to accomplish. But typically when you are capitalizing a project you don't don't record expense, you create a "construction in process" account in your asset section. When the building is complete, you then close this account out to the capital asset account.

The harder part and where an accountant can be helpful is determining which expenses should be included as part of the construction in progress account.

[SheilahH]

I have the asset account set up, but where does the corresponding credit/debit go to when paying a contractor if not expense? I have been bringing the loan draws into the asset account and then paying the contractors from this asset account as well.

[Jeff]

We you get the money from the bank normal entries would be:

Credit: Construction Loan account (liability)
Debit: Checking account (asset)

When you pay the contractor for work you would:
Credit: Checking Account (asset)
Debit: Construction in Progress (asset)

Accounting would say that there is no expense involved at this point. You have exchanged cash for a building. Or, one form of an asset for another asset. You had cash, now you have a building.

That building you are going to use in future periods, so the expenses of using that building will be recorded in a later time period when you are actually receiving the benefit of using the building. The expense then would be recorded as depreciation.

[SheilahH]

I never considered using two asset accounts in the entry. Thanks so much for taking the time to help me.

Sheilah