Mortgage Samples and Building Fund

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Mortgage Samples and Building Fund

There are a number of ways a Building Fund fund/equity account could be used by different organizations. This page discusses just a few of those options, with sample transactions. If you aren't clear on the special meaning in the ACCOUNTS program of funds, and how income and expense accounts are linked to them and cause their "implicit" balance to change, please carefully first read the Funds and Fund Accounting section in the Help page on Accounting Concepts, before continuing on this page.

 

It's important to distinguish a fund/equity account that we will call the Building Fund from any bank account in which money for the building is being held. If there is such a bank account, you will want to be sure to call it something different in the program, such as Building Savings Account. The examples below do not refer to such a bank account, instead assuming that all transactions go against a common chequing account. If there was such a bank account, there might be transfers between it and the chequing account, but since they would not affect the Building Fund balance, they are not really relevant to these considerations.

 

Other accounts that might be involved might be named:

 

Building Fund Income Receipted, an Income/Revenue account that records donations to the Building Fund, and that is linked to the Building Fund;

Mortgages (or perhaps a more specifically named account), a Long-Term Liability account holding the current mortgage principal amount;

Land and Buildings, a Fixed Asset account holding the value of the building;

Mortgage Interest, an expense account that records the interest portion of mortgage payments, that is linked to the Building Fund;

Mortgage Expense, an expense account that records the entire mortgage payment (if you don't want to separately track interest and principal), that is linked to the Building Fund;

Building Expenses, an expense account for general expenses related to the building, such as repairs and maintenance, that is linked to the Building Fund.

 

When specific methods of data entry are mentioned below, they will mostly be done on the register windows. However, in many cases other special-purpose data entry windows could be used instead, if desired.

 

Saving up and Buying a Building for Cash

 

In this scenario, donations are made to the Building Fund until there is sufficient cash to buy the building, then it is bought outright. Donations would be recorded in the register for the appropriate bank account, with the other account being Building Fund Income Receipted. (Of course, a bank deposit might include donations for multiple purposes, so it might need to be split out.)

 

When the building is bought, the transaction would be a Payment from the bank account, with the other account being Land and Buildings, to record the value of the building.

 

You now have two options, in terms of the fund balances. You could leave the Building Fund unchanged, so that the implicit Building Fund balance now represents the value of the building (the explicit value of which is held in the Land and Buildings asset account).

 

Alternatively, you may want to "use up" the balance in the Building Fund, now that its purpose has been served. To do that, a transfer could be made from the register window of the Building Fund, decreasing it by the amount of the payment for the building, and increasing the General Fund  by that amount. (An inter-fund transfer does not actually move any money, it just changes the fund balances. Of course, there may also be a transfer between bank accounts involved.) The increase in the General Fund (a  credit, in technical accounting terms) would balance out the increase in the Land and Buildings account (a debit) on your your Balance Sheet.

 

Taking out a Mortgage to Buy a Building

 

If you take out a mortgage, the transaction could be entered on the register window for the Mortgages (i.e. mortgage principal) account, entering an Increase to that account of the amount of the mortgage, with the other account being Land and Buildings, which records the value of the building that you now own. (OK, you sort of don't "own" it yet, since you owe all of the money, but this is still the correct transaction.)

 

The transaction might actually be a bit more complicated, because the money might flow through another account first, but still, this would be the correct effect.

 

Using a Building Fund just for General Building Expenses

 

If you have a mortgage, one option is to pay the mortgage payments out of your normal general donations, with no reference to a Building Fund. But you might allow allocated donations to a Building Fund to help pay for other expenses, such as repairs and maintenance. Such donations would be recorded in the bank, against Building Fund Income Receipted, and then the expenses would be paid from the bank, against Building Expenses. Since both accounts are linked to the Building Fund, the donations would implicitly increase the balance in that fund, and the expenses would implicitly decrease the balance in that fund.

 

Mortgage Payment Options

 

The traditional accounting method requires you to know how much of each mortgage payment is principal, and how much is interest. Your financial institution that holds the mortgage should be able to give you this information. By using this information, it is possible to track the declining balance of principal owed on the mortgage,and always have that show accurately on your Balance Sheet.

 

With this information, a mortgage payment would be recorded as a payment on the bank account from which you were paying it, split out to Mortgages (the principal) and Mortgage Interest. The principal part of this transaction would thus reduce the amount in the Mortgages liability account, to show the new balance.

 

Some organizations will prefer to keep things simpler, and just record the total payment as Mortgage Expense. They might have their accountant make an adjustment at the year-end, to transfer the total amount of principal payments for the year from the Mortgage Expense account to the Mortgages account (thereby having the same effect as if it was done in the traditional way, described in the previous paragraph). If such an adjustment is not made, the declining balance in your mortgage principal is not being tracked in your accounting system.

 

If you do not link any of those accounts to a Building Fund account, then obviously these transactions do not affect your Building Fund (if you have one at all). How this affects a Building Fund, if you do link these accounts to it, will be discussed in the following section of this page.

 

Using the Building Fund for Mortgage Expenses

 

Suppose you have donors donating specifically to help pay the mortgage. It would make sense to have a Building Fund then, which tracks how much money has been donated, and how much spent. You would set it up with the links to the accounts as described in the point-form list of accounts near the top of this page.

 

Ideally if exactly the same amount was being donated as you need to pay on the mortgage each month, the Building Fund balance should stay the same each month. However, because only income and expense accounts can be linked to fund accounts, but there is a liability account (Mortgages) potentially involved in the mortgage payment transaction, that creates a difficulty.

 

To see why, suppose the implicit balance in the Mortgage Fund is currently $0. Someone donates $1,000, the amount of your mortgage payment. That is recorded in your bank, with the other side being Mortgage Fund Income Receipted. The implicit balance in the Mortgage Fund goes up to $1,000. Now you make your mortgage payment, using the traditional accounting method of splitting it between principal and interest. Say $100 goes to Mortgages (to reduce the principal) and $900 to Mortgage Interest. Because Mortgage Interest is linked to the Building Fund, this reduces the implicit Building Fund balance by $900, to $100.

 

That's arguably a problem - you got a donation for exactly the amount of your mortgage payment, and you made that payment, but somehow your Building Fund balance has gone up by $100.

 

One way to view this is that the $100 increase is balancing out the decrease in your Mortgages liability account (your debt on the mortgage), and that's OK. But if you are using the Building Fund to track whether you have enough funds to pay your mortgage each month (without dipping into donations made for other purposes, or general purposes), it's really not desirable.

 

If you want to correct that, it's pretty easy. Go into the register for the Building Fund, and enter a transaction to decrease it by $100, with the other account being your General Fund. That reduces your Building Fund implicit balance back to $0, as expected. And the $100 increase in the General Fund then balances out the decrease in the Mortgages liability account, which is reasonable.

 

Other Complications

 

Some organizations may choose to separate out the mortgage payable amount in the current year into a Current Liability account, by making a transaction at the start of the year, decreasing the Long-Term Liability Mortgages account and increasing an account such as Current Year Mortgage or words to that effect.

 

That account could include or exclude the interest component of that year's upcoming mortgage payments. If it includes the interest, though, you could not set it up by just a transfer from the Mortgages account balance, since that is only principal. You would have to decide what other account the interest component you were putting into Current Year Mortgage balanced against.

 

Another complication is that depreciation is often recorded on a building, reducing its value over time.