This is a bookkeeping question.
Every month we make a mortgage payment which includes: Principal, Interest, and Tax & Insurance.
I split the payment in Quickbooks Online, so every month our mortgage goes down, plus we have an interest expense on our books.
As for the Tax and Insurance, the money goes into escrow with our bank.
Initially I had created a current asset accounts in order to represent the escrow.
But that means that our income statement will not reflect these expenses until those are paid.
I am leaning towards expensing them every month, and then readjusting them in case the number is different. This will help us see better our P&L on a monthly basis.
Upon discussing this exact issue w/ my CPA, we were instructed to go the route of a current asset account. You then deduct the expense during the 1-2 times per year your taxes and insurance are paid.
While your P&L will not reflect this "monthly expense", your cashflow should. The dollars going into Escrow should represent negative cash. On a monthly basis, your cashflow is more important than P&L. At the end of the year, all expenses are in as expected. You can then divide by 12 to get your AVG P&L per month.
I agree its a bit annoying not to get the most accurate picture every month. This is just the advice we were given.
@Nick Baldo your CPA is correct here.
@Ben Bakhshi you don't record the monthly deposit into escrow because it's not a real expense and you are likely a cash based accounting business. When using cash based accounting, you record the expense when it's actually incurred. As long as the funds are sitting in an escrow account, the money is still yours as the expense hasn't yet occurred.
You can certainly record the expenses each month but it can be overkill for a cash based accounting business and it won't accurately reflect your books.
Hope this helps.
This is always the dilemma with cash based taxpayers who want accurate management reporting out of their bookkeeping system. You report your expenses for tax purposes when you actually pay them, which in this situation is when the funds are paid out of the escrow account, but you want to see how you're doing on a monthly basis and those lump sum payments can wreak havoc with your understanding of how things are going.
If you're using QuickBooks, here's a way you can "trick" the system into doing both.
Each month, record a vendor invoice for 1/12th of the taxes and insurance. Then when those funds come out of your escrow account, "pay" the bill.
To look at how you're doing for yourself, run your reports on the Accrual Basis for QuickBooks. When you give the information to your tax accountant at the end of the year, switch the reports to run on Cash Basis.
You can theoretically do the same thing for amounts that you are "saving" for repairs or CapEx. Create a vendor invoice every month for the amount you are transferring. Then you "pay" those bills any time you complete a CapEx project or a major repair. You'll have unpaid dummy invoices accumulating in the event you don't actually spend anything.
You would create two "Other Expenses" accounts called Budgeted CapEx and Budgeted Repairs. Each month, enter the amount that you're saving into each account. Then when you run a Profit and Loss Report on the Accrual basis each month, these figures will show up for you and you can use those figures in any way you want, particularly if you download the report into Excel and then include some financial analysis ratios on them.
Then, when you actually incur a major repair or CapEx, enter the transaction as normal, to either a regular Repair Expense or CapEx account and then also enter a Vendor Credit Memo that will relieve your Accounts Payable and also lower the amount in the Budgeted CapEx or Budgeted Repairs expense.
It's not for the beginning bookkeeper as you can really screw things up if you aren't careful. But for those who are a bit more advanced and really want to see these types of figures in a report, it works pretty well.
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