To set up a loan or mortgage and show principal, interest and escrow payments, follow the steps below that best suit your needs:
Note: The accounts used here are for illustrative purposes only. Please consult your accounting professional for the exact accounts to use.
If you want to track escrow activity:
Create three accounts:
- From the main menu, click Banking | Chart of Accounts List. Right-click anywhere in the list and select New Account from the pop-up menu.
- From the Type drop-down list, choose Long Term Liability.
- Create an account to track the liability. Enter the Name of the loan (“UMB Truck Loan #2” for example), the amount of the Opening Balance (the amount for the total unpaid portion of the loan), and the As of Date for the amount owed.
- Click Next.
- Create an account to track the payments made. From the Type drop-down list, choose Other Current Asset.
- Enter a name for the account (“UMB Truck Loan #2 Escrow,” for example), the amount of the Opening Balance (if there have been any prior payments) and the As of Date.
- Click Next.
- Create an account to track the interest expenses. From the Type drop-down list, choose Expense.
- Enter a Name for the account (“Interest on Loans”, for example).
- Click OK.
Make a loan or mortgage payment:
- From the Banking menu, choose Write Checks.
- On the Expenses tab, enter the accounts created above and the appropriate amounts. You will want to choose two accounts, the Escrow account and the Interest account. You will normally get the amount information from your lending institution. If this information comes to you later, see the “Make transfers from the “Escrow” account” below. Note: Total Office Manager does not do loan amortization.
- Click Save\Close.
Make transfers from the “Escrow” account:
- You can always go back and edit the check if your bank sends you a statement of some type informing you of your prior months interest and escrow amount. You may also make an Adjusting Journal Entry. We cover that below.
- From the Banking menu, choose Make Journal Entry.
- Choose the “Escrow” account, and enter the amount in the Credit (decreases it) column.
- On the next row select the expense account and enter the same amount in the Debit column (increases it).
- After making the correct entries, click the Save\Close button.
If you do not want to track escrow activity:
- Create three accounts as in Step 1 above, except in place of the asset account, create additional expense accounts for the escrow amounts.
- Make a loan or mortgage payment as in Step 2 above, and on the Expenses tab use the escrow expense account(s).
Two expenses that sometimes make up an escrow payment are insurance and taxes. You may want to create these expense accounts for use here. (See Step 1.)