Hi Amy I We want to talk today about what happens if you record your mortgage payment incorrectly? If mortgage payments aren’t recorded correctly your financial statements are not accurate You’re not able to make good decisions on your business based on the reports. You’re seeing and Your CPA is going to spend more time which will cost you more money to keep your taxes prepared And your QuickBooks or software cleaned up Okay, well I think this is a great topic and when we talked about it. I Felt like this was something our readers can definitely benefit from, so today Amy Heinen from Quick Action Accounting and I are going to talk about three main things what an escrow account is how to record mortgage payments when you have an escrow account And if you do it wrong what happens and then we’ll do a little summary at the end So why don’t we begin with what is an escrow account? The escrow account is like a holding account that your mortgage company has of your funds you pay into it each month when you make your mortgage payment and they hold that money until you need to pay your taxes on the property or insurance Okay Well, why don’t we just get started then, let’s show everyone how do you record a mortgage payment when you have an escrow account? Okay In QuickBooks, I have a company here that has set everything up correctly they in their chart of accounts They have set up the escrow account as a bank account The reason you set the escrow account up as an asset in your QuickBooks is It’s a bank account basically. It’s money that is at you’re use to pay for expenses that you are generating revenue from okay, so We have escrow account setup as a bank account and Assuming the company is in the process of acquiring more properties. We set up a sub-account for just this property Hunters Creek escrow and Then they have their fixed assets from when they purchased it set up, so If we look under the vendors And how they record this loan payment throughout the year The mortgage payment split into three parts it has the principal Amount that is applied to the loan balance The interest expense which is an expense to the business and then the escrow account which is the money held To use for property taxes and insurance Okay, so on this particular entry we split it according to the statement I’ll bring up. This is a statement that Applies for this mortgage and this property and as you can see on this statement. It’s broke out Right here for the last payment how the principal interest and escrow is split So back in QuickBooks if we were to record that November payment Start with a new one out of the checking The loan payment amount total is Eight seventy one thirty seven and then on the statement right here it shows that the principal amount $166.32 The interest amount was for $434.99 and the escrow Going into that holding account is $270.06 So we’ll just enter that split So we recorded the amounts and split it up according to that statement Mm-hmm at the time that this loan payment actually came out of the checking you wouldn’t have had this statement yet mm-hmm So what I usually do is just record it With the last break out and then once I get the statement I go in and edit the transaction to be accurate Because what’s what’s changing is the amount of principle being paid, right the principal and interest Split changes as the principal goes down the other Thing that might have happened is if the property taxes were paid out of the escrow you would see that on the statement, okay? The point of making this split is so that your QuickBooks will match now if we go back to our chart of accounts and We look at our loan balance For this property Our ending balance after recording that payment is one hundred and six thousand nine hundred nine and four cents if we look if we look back at the statement it shows right up here your current loan principal balance and that matches mm-hmm As well, it shows you on the statements your current escrow balance of $1,026.35 cents And if I look here we match once again our escrow okay? So that helps us know how much is in there for the next property tax or insurance payment that might come out of it So you have a very clear visual of what’s really going on with each asset that you have when you are recording it correctly That’s correct Then you’re able to run in your reports Under the company and financial reports you can look at a profit and loss by job Which will show you all of the income and expenses related to that property, mm-hmm And you can see that the interest expense for the year will match It will match the statement total interest paid okay $4,821.49 So earlier in the year property taxes were paid out of the escrow account Now we were putting that money in what is a checking account in our chart of accounts for the escrow we can open that check register up and See that each month The payments Goes in Back in March the property taxes that were due were paid out yeah, and this just came out of the escrow checking balance versus your checking account, okay, and Then it happens again in September, which is how we keep that escrow account in line mmm? So your picture is very accurate as you look over your reports and your balances of your accounts, okay? Now let’s show an example of a company that Did not record it correctly You’ve seen many of those you can imagine if there were ten different properties How keeping this straight It’s much easier if you’re doing it as you go versus at the end of the year trying to straighten it all out What if a mortgage was sold between lenders? Mmm-hmm and then all of the year, that’s a nightmare for the CPA to get straight. Yes, I Feel your pain Okay Not so real estate company, unlike smart management that does not have an escrow account set up in their chart of accounts, okay, and When they’re recording their loan payments throughout the year They’re simply recording it to mortgage payments. “Mortgage payments?” The CPA will ask, and They’ll look up that it’s just an expense account so they’re putting all three parts the escrow, the interest, and the loan payment into an expense account Okay, wrong right Ami put together a nice comparison of a profit and loss statement between smart management And not so real estate company it nicely illustrates the impact of incorrectly recording mortgage payments For this particular statement the escrow payments changed during the year so to be able to back into the numbers here is a detailed breakdown Of all the payments that were made Which are then summarized in the yellow column and they match the loan statement? Revenue is the same between the two companies the difference exists with the expenses as you can see smart management has their interest expense matching the statement from the bank and They have property taxes that were paid out of their escrow account They had a couple other expenses as well that were paid out of checking for some furnace repairs and insurance expenses Over in not so real estate. They have all of their mortgage payments that they made for the entire year sitting in their expense account and They have not recorded any property taxes for the year In the end, they end up overstating their expenses which then understates their profit On this example that is a difference of over $1,900 dollars that’s a lot of money for just one property and This could mean that they are not prepared for their tax liability at the end of the year On the balance sheet if you look at smart management, they have an escrow balance in their assets. But, not so real estate does not include an escrow balance which under states their total current assets by the amount of the missing escrow balance of approximately $1000 In the liability section you will see that not so real estate is not applying any of the payments from the loan to reduce their loan balance, so they are overstating their liability all of these Things that are wrong incorrect That are incorrect impact the bottom line Ok Amy this has been awesome I have personally learned a lot from this So why don’t we recap with just saying, telling our viewers the key takeaways, if you record your mortgage payment incorrectly What happens? with those incorrect transactions in your Bookkeeping software you’ve thrown off your expenses most likely you’re overstating your expenses you may have understated them and That throws off your bottom line You’re not able to tie your balance sheet for the liability for the loan or mortgage With the bank statements or the escrow balance so your assets and liabilities are affected as well as your bottom line So If you are at that time in the area are preparing for taxes get it cleaned up You’ll save yourself some money with your accountant definitely yeah Okay, thank you so much Amy for being here today to talk with us, and as a reminder to our viewers. This is Amy Heinen from Quick Action Accounting, and we will share all of her contact information on the screen, and I’m Jerry Frank And I’m CEO of STRATAFOLIO, you can find us on Twitter you can find us on Facebook Google+ and YouTube and we would very much appreciate any likes and subscribe to YouTube And if you have other suggestions for videos or ideas that would give you some value Reach out to us. We’d love to hear from you. Thank you very much, have a great day!