Building Fund and Mortage Payments

Hello again ACCOUNTS advisors.

I had a question from a user in a church yesterday, which has a Building Fund, and a mortage on their church building. As usual, the mortgage payments are made up of a principal component (which reduces the long-term liability account balance for the mortgage) and an interest expense component.

She was hoping that the principal component would reduce her Building Fund balance, but of course it doesn’t, because in my design only income and expense accounts can be linked to fund accounts. (The interest component would of course reduce the Building Fund balance, because its account would be linked to the Building Fund account.)

In some ways I can see what she is thinking. If $1,000 has been donated to the Building Fund, to help pay the mortage payments, and an $1,000 mortgage payment is then made (perhaps composed of $100 principal and $900 interest), one might indeed expect the Building Fund balance to be reduced by that $1,000, since the money was spent.

Does anyone have any bright thoughts on either how to explain why this is not appropriate, or how to make it happen in terms of what the splits on the transaction could be? I’m afraid that I don’t.

Thanks.

6 thoughts on “Building Fund and Mortage Payments

  1. The Church that I did the bookkeeping for had a separate building fund and I would record the entry as coming out of the regular account and then tsf the payment at the end of the year from the building fund back into the regular account or you can do that every month. We only had the regular account as a chequing account so tsf the funds used to the regular account from our building fund and our food bank account. It could work the same for the mortgage payment but there should be an entry to record the payments in the liability account but I would think that the interest expense should stay in the expenses but the principal payment should not. Ruth Moyer > Date: Tue, 29 Jan 2013 14:49:00 +0000 > To: rmoyer45@hotmail.ca >

  2. Every mortgage payment will have a different amount of interest and principal (interest decreases steadily, as the interest rate is applied to the declining balance of the principal with each payment.) so what I would do is:
    1. get an amortization schedule for the loan – either from the lender or generate it online (there are various). That will say how much principal and interest there is for each payment, by date. (or you can calculate it on a spreadsheet.)
    2. Is the building fund an actual bank account (the account the mortgage payment comes out of)?
    If not, then each month (or whatever interval she chooses) there should be a transfer from the building fund to the bank account (the one that the mortgage cheque is drawn on) – for the amount of that month’s principal payment.
    a) – debit bank account – amount of principal payment
    – credit Building Fund – amount of principal payment (this decreases the amount in the fund)

    b) – credit the bank account – the entire amount of the mortgage payment
    – debit the appropriate interest expense account for the amount of that month’s interest payment
    – debit the principal amount to the mortgage payable account (this would presumably have been set up at the time the asset was purchased)

    I think that would work. (I would do it with journal entries – I’m not sure how you could automate it.)

    Also – I’m not quite sure why the Building Fund wouldn’t also pay the interest, since that’s a cost of acquiring the asset?

    • Thanks, Lis.

      When I say “Building Fund”, I’m not referring to a bank account, but rather what the ACCOUNTS program calls a fund – an equity account, used to track the difference between money donated for a given purpose and money spent on that purpose. It does that tracking by starting with an opening balance in the fund, then making “implicit” changes in the balance by adding and subtracting off transaction amounts in Income and Expense accounts that are linked to that fund.

      So suppose you link a Building Fund Donations income account to the Building Fund, and also a Mortgage Interest expense account to the Building Fund. Then suppose someone donates exactly the amount of the mortage payment, for that purpose. That will increase the implicit balance in the Building Fund by that amount. Now you make the mortage payment, splitting it as you have described between the Mortgage Principal liability account (for the principal component) and the Mortgage Interest expense account (for the interest component). That will decrease the implicit balance in the Building Fund, but only by the amount of the interest. Thus causing the Building Fund balance to increase, which doesn’t make intuitive sense!

      I’m coming to the conclusion that there is no good solution to this problem, based on a number of emails I have had with a few other users over the last couple of days. An approach that makes the Building Fund stay balanced is to just count the entire mortgage payment as an expense, but then you aren’t tracking the declining principal balance, which also seems to me to be undesirable.

  3. Dan,

    In our case (when we get to that point with our Building Addition), it is my intention to treat the regular payment as a charge to our General Account, and post it as a split entry each month between General Fund interest expense (Property category) and Liability-Long Term Debt. Our Building/Mortgage Debt Reduction Fund will simply be used as a means of allocating extra funds designated towards accelerated repayment of the Mortgage Debt (and any disbursements from that account would normally go directly to capital debt).

    I don’t know if that helps the inquiring party or not, but it seems to me that debt servicing (principal or interest) is a budget/planning matter pertaining to General Fund (Operations), not an internally Restricted Fund account. The latter Building/Mortgage Reduction Account would probably be best used for only for extra payments.

    Kindly,

    David Cornish

    • Thanks, David. What you are suggesting would still have something of the same problem, if that “Building/Mortgage Debt Reduction Fund” is an actual fund (equity account) in ACCOUNTS. You want extra principal payments that you make to reduce that fund balance, but because they are not expenses (just transfers from a bank account to the mortgage company, which reduces the ility-Long Term Debt). However, I think you could easily handle that by making a transfer of the same amount from the Building/Mortgage Debt Reduction Fund to your General Fund. (And perhaps that is the solution for the original problem too – inter-fund transfers!)

  4. I think I have this figured out reasonably well, including the fact that there are a lot of different ways of looking at both mortgages and building funds. I’ve added a draft Help page about this to the Help, and have sent it by email to those of you who I’ve been corresponding with in more detail about it. If anyone else wants to see it before it goes out in an official version (which will be really soon, because I also fixed a bug in the Balance Sheet report in the process of testing solutions for this), let me know.

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