What is Mortgage Payable?
The term
mortgage means long-term financing that is used to purchase property, which
itself, serves as collateral for the mortgage until it’s paid off. During the
period equal payments, including principal and interest are essentials for a
mortgage. However, the first payments include more interest than principal and
over the life of the mortgage principal portion increases and interest portion
decreases. The reason why interest decreases is because interest is calculated on
the outstanding principal balance which decreases as the mortgage payments are
paid.
To make it
clear, let’s work over it with an example. Someone obtains a fifteen year
$175,000 mortgage with interest rate %7.5 and $1,622.28 monthly payment. The
borrowing and receipt of cash are recorded with increase (debit) to cash and
increase (credit) to mortgage
payable. As soon as a payment is made, mortgage
payable is declined for the principal portion of the payment, interest cost
is increased for the interest portion of the payment, and by the payment which
is $1,622.28, cash is declined. In the first payment the portion of interest is
$1,093.75 that is calculated by multiplying the $175,000 (principal balance)
times %7.5 (interest rate) times 1/12 (since payments are made monthly).
With
this way, interest of the second portion is $1,090.45. The reason why it is
different than the first payment is, the outstanding principal balance was
increased by $528.53, which is difference between first payment amount and first
interest expense. The second interest is calculated by multiplying $174,471.47
(principal balance) times %7.5 (interest rate) times 1/12. Until the mortgage
is paid off, this method to calculate the interest continues. The difference
between the cash paid and the interest cost of each payment shows the principal
portion. The entries to record the receipt of the mortgage and the first two
installment payments are:

YORUM EKLE