According to the definition of current liability, a principal has to be paid within the next 12 months otherwise it won’t count as a current liability. A mortgage payable is also considered as a current liability because the about of this liability is usually paid within the next 12 months. If there is any remaining balance then it is reported as a long-term liability.
Definition and Example of Mortgage Payable
A mortgage payable is a type of liability for a property owner and according to the liability, the owner has to pay the mortgage amount that is secured by the property. Usually, the mortgage payable contains the principal amount that the borrower owed on a mortgage loan. If there is any interest acquired since the last payment then the interest amount will be considered as Interest Payable, a current liability. However, it is not required to report the future interest on the balance sheet. For example, if you have a mortgage loan payment of $238,000 and if your monthly mortgage payment is about $4,500 per month then each monthly payment is consist of a principal payment ($3000) and interest payment ($1500). So, according to this information, you have to pay $36,000 of the loan’s principal in a year. So, the amount of $36,000 is the mortgage payable and current liability. Now, your remaining principal is $202,000 and it is considered as a long-term liability. This is because you don’t have to pay the remaining $202,000 within one year of the balance sheet date.
Journal Entries for Mortgage Payable
Below I will be creating journal entries for the accounting for mortgage payables. It will give you a clear idea of how accounting journal entries for mortgage payables are made. Let’s say a company name XYZ Ltd. took a mortgage of $150,000 for 12 years with an interest of 3% per year. So, according to the loan term, the company has to pay $15,000 each year as an annual payment. Now the company will have a payment schedule as below:
|Years||Loan Outstanding||Total Payment||Interest Payment||Principal Payment|
When the company takes the mortgage, it will make the mortgage payable journal entry like the below table:
This is because when the company takes the mortgage, its liabilities increase by $150,000, similarly, the assets also increase in the same amount.
When the company makes the monthly mortgage payment, it has to make two journal entries. One for interest expense and the other for the reduction of mortgage payable. Now check the below table –
Pros and Cons of Mortgage Payable
|Pros of Mortgage Payable||Cons of Mortgage Payable|
|With mortgage payable, you will be able to significantly increase the capital||It requires a deposit and in some cases, you might have to pay a heavy deposit|
|A mortgage payable can be stretched for up to several years||There will be additional property maintenance costs that the business has to bear|
|As a business owner, you can focus on other business matters like deals, spreading the business, etc.||Property costs change contagiously, so there is a potential chance that the value of the property could decrease|
|Mortgage payable has lower loan costs compared to other borrowed payments for businesses||If you have a variable rate loan, then it could be more costly and you have to depend on the bank about the interest arte|
|Mortgage payable also offer a leasing feature for business to earn extra money|
FAQs about Is Mortgage Payable a Current Liability
What are the types of liabilities in the account?
In accounting, there are quite a few types of liabilities available. They are –
- Accounts payable
- Income taxes payable
- Interest payable
- Accrued expenses
- Unearned revenue
- Mortgage payable
What are liabilities?
Liabilities refer to all types of current debts that a business owns to other businesses, organizations, employees, vendors, etc. Usually, a business incurs liabilities from its day-to-day business operation. The liabilities of a business can go up and down and it is totally normal. If your business has more debts then your liabilities will be high. On the other hand, if your business has less debt then the liabilities will also remain low.
Is a mortgage loan a current or non-current liability?
A mortgage loan is a non-current liability. This is because, for a mortgage loan, the payments are made in a period that is more than 1 year from the date of the reporting period.
Is a mortgage a long-term liability or current liability?
Mortgage and other types of loans like car loans, personal loans, etc. are considered as long-term liabilities. However, the payments of these loans are considered a current liability.
Is mortgage payable liability or equity?
A mortgage payable is not equity, it is a liability. In fact, it is considered a current liability.
Where does mortgage payable go on a balance sheet?
On a balance sheet, a mortgage payable goes to the liabilities section and is considered as credit.
Last Updated on August 7, 2022 by Ana S. Sutterfield
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.