Double entry Accounting and Asset, Liability, Expense, and Equity for Home!

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Double entry Accounting and Asset, Liability, Expense, and Equity for Home!

Frank Fiore Jr
Investor · Lakewood Ranch F · Member since 2013 · 79 posts · 11 votes

If you can provide insight into any of this I would be grateful, I have read GnuCash help / tutorial, and did some searching online, I have not found the necessary information to understand this. Maybe I need to take an accounting class!

I am trying to sort out how to enter data for my existing 2 family house in GnuCash an accounting software. (If I can understand the basic accounting I don’t think the software is going to matter)

Current I have set up: (in the software)

I have Asset: Home (Need to know what “value” to use)

I have Liability: Mortgage (I am using outstanding principle)

I have Expense: Interest (expense monthly split entry from Mortgage payment in checking account)

Notes / Questions:

N: I have owned the house for 10 years but want to start tracking from this New Year 1/1/2014

Q: When I enter the “Home” as an Asset how do I determine the value to enter? Current Market Value? Or Amount I have paid to date (principle, repairs, etc…)?

Q: Don’t I have to somehow track this as equity? Tie it to Equity?

Q: Liability I am assuming is the remaining Principal? (Opening balance equals existing principal balance)

Q: Interest: monthly payments are made from checking account (split entry (Mortgage & Interest)

Q: Do I add rental income under expenses?

Q: How do I handle the Escrow (taxes and Insurance) they are rolled into the payment, maybe just split entry the Mortgage payment each month to include Loan, Interest, Taxes, Insurance? I think that should do it.

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  • Frank Fiore Jr
    OP
    Investor · Lakewood Ranch F · Member since 2013 · 79 posts · 11 votes
    12y

    Ignore the second to last Question " Q: Do I add rental income under expenses?" No idea where that came from? :)

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  • Account Closed
    Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
    12y

    Frank, you seem to have a pretty good start.

    For the Home Value I would use what you paid for it plus any major upgrades to the property. This would equal the cost or basis that you have in the property.

    Equity would be the difference between your assets and liabilities at 1/1/2014. For example, you have $80k house and $60k loan your equity would be a credit balance of $20. The equity balance will change if you put additional personal cash into the property and by the net income generated each year.

    You are correct about the liability balance and splitting the mortgage payment if there are escrow portions.

    Rental income should be a revenue account. The entry would be Credit - Rent Income Debit - Cash.

    Good luck!

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  • Frank Fiore Jr
    OP
    Investor · Lakewood Ranch F · Member since 2013 · 79 posts · 11 votes
    12y

    @Account Closed , thanks for the quick reply. Should I leave Equity entries out of this? Or should I put 2 Equity Open balance entries one for the Home value and one for the Loan value? to show the total equity? (one being debit and one being credit?)

    I don't even want to try and figure out how to add current market value to the equity?

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  • Account Closed
    Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
    12y

    Not sure how everything looks in gnucash, but if there are no other asset or liability account the opening balance entry would be

    Debit: House Cost / Basis

    Credit: Mortgage Loan

    then a debit or credit the equity account to balance the entry for the beginning balance. The first rule of accounting is Assets = Liabilities + Equity, so you would need to use the equity account.

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    12y
    Originally posted by @Frank Fiore Jr:

    Q: When I enter the “Home” as an Asset how do I determine the value to enter? Current Market Value? Or Amount I have paid to date (principle, repairs, etc…)?

    Q: Don’t I have to somehow track this as equity? Tie it to Equity?

    It depends on what you want the numbers for. If you are going to use those numbers to do taxes, use basis. If you want to know your net worth and use the number for personal information, then you may want to use current market value.

    For tax purposes you need to track your basis. That is basically cost plus upgrades for a personal residence. Subtract depreciation if it is a rental.

    Net worth is based on current market value. So if you home has appreciated substantially then you may want to put in current market value.

    Generally you don't need to know equity for tax purposes. The tax man wants to know what you pay for an asset (it's basis) and what you sell it for (to calculate gain) I hope this clears it up a little. - Ned

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Either I type too slow or too much, others posted and beat this one. :)

    Let's back up a bit. If this system is to be used for taxes and the property is already in service, you need to understand how the system will be figuring things. Does the system compute interest on liabilities, is depreciation computed?

    If you begin with a mortgage balance and it picks up payments of P+I without addressing the term remaining you'll get junk. The liability may need to be started at the original loan amount and the original date.

    If you had depreciation last year and you enter a market value today, you may get a different depreciation schedule as well as it effecting financial ratios based on the cost of the asset.

    I see Tim is an accountant and is correct breaking out taxes and insurance from the total payment. You just use the P+I to the liability, expense insurance and taxes as paid on a cash basis.

    These are balance sheet entries, for rental income you're going to an income statement. There you'll be entering gross income (rents) and then listing expenses that will give you net income before taxes.

    I suggest you run down to a local book store (a college book store would be ideal) and get an accounting text book, Accounting 101. It will cover bookkeeping and financial statements.

    Even so, if you'll be doing financial ratios, ROI and such, the numbers you use can matter. I'm not familiar with your system, but most accounting packages compute other aspects, like amortization schedules, depreciation, equities can moves from income to your balance sheet.

    Another issue will be identifying expenses vs capitalized expenses and how to "slot" expenses to appropriate accounts and managing any escrow accounts for deposits from tenants (that money isn't yours, it's your liability).

    So, yes, if you're going there, I'd suggest self study and ask questions here, we have lots of bean counters here including me. haha

    Consider getting some help in setting up your system, won't take long for an accountant/bookkeeper and it should be very affordable, find individuals, not an accounting firm so much. :)

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  • Chris T.Pro Member
    Rental Property Investor · Charlotte, NC · Member since 2013 · 491 posts · 253 votes
    12y

    @Frank Fiore Jr I too have recently been setting up my real estate accounting using GnuCash. I am have been trying to figure out the best way to organize and track everything. While I am not able to say what is best, I can tell you how I have done it and what I have learned.

    First off, from what I have read, many people struggle to find the best way to track real estate in GnuCash. What I mean is, if you want to be able to easily look up the transactions for a single property (if you are tracking multiple) you have to play a few tricks. Since you only have one property, that should make things much easier, but you might need to plan ahead if you plan on acquiring additional properties.

    If you are planning on using GnuCash to help when it comes to tax time, you will most likely want to set up your property as an Asset with sub accounts for the value of the Land and the value of the Building. This will allow you to track your deductible basis amount (Building). You most likely will also want to set up an Asset Account for your Escrow account and your Checking/Saving Account. That would give you 3 Asset Accounts (Property, Escrow, and Checking/Saving) with your Property account having two sub accounts (Land and Building).

    If I understand what others have said your current Land value will be the percentage of your Land value to Total Cost Basis at time of purchase (Sales price + Closing costs + improvements to the property). Your current Building value would be the percentage of Building cost to your Total Cost Basis minus the amount you have depreciated over the past 10 years. This will show your property to have a value less than what it was when you purchased the property. To my understanding, the amount that your property has appreciated in the past 10 years is an unrealized gain so is not accounted for until it is sold. Others have accounts for this by either tracking the current value of the property separately or adding another Asset that is linked to the Net Equity for Appreciation.

    As others have said, your Mortgage payments will need to be Split transactions that separate the payment into Principle, Interest, and Escrow payments. I have also set up my Expenses into the exact categories that are listed on the Schedule E tax form. That way I already have my break downs come tax time.

    Hopefully this makes sense and helps. If you have any other questions I can try to answer them or at least we might be able to figure them out together as I am still working on finding the best way to track multiple properties in GnuCash.

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  • Frank Fiore Jr
    OP
    Investor · Lakewood Ranch F · Member since 2013 · 79 posts · 11 votes
    12y

    Thank you all.... @Bill Gulley , @Ned Carey , @Account Closed I will digest and be back with questions....

    @Chris T. , I'll see what I come up with and let you know. This may be a stupid question but are you using 2 separate files in GnuCash,one file for business and one for personal? Currently I don't hold my property in an LLC so I just wanted to include it with all my other personal financials. (same file)

    Long term obviously I will want to track multiple properties as that is part of the long term strategy....

    Background Info; no need to continue reading......

    I am really still in the "getting started" faze of all of my REI life. I have one property but by no means and I a RE investor. I have owned the property for 10 years but my education really only started 7 months ago when I found this site. I have been reading, learning, attending meeting etc... and after sorting out all the mistakes I made with my original purchase I am in the process; as you may have determined; or squaring away my financials.

    You don't realize how much you don't know until you start learning a little something! :)

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  • Chris T.Pro Member
    Rental Property Investor · Charlotte, NC · Member since 2013 · 491 posts · 253 votes
    12y

    @Frank Fiore Jr I too do not have our properties in an LLC but I currently do not use GnuCash to track my personal finances. I have a separate savings/checking account so it is fairly easy to keep the funds separate. Any money I spend via a personal credit card or such, I mark as a "Personal Loan" Liability and then pay myself back.

    If you do track everything in one file, I would set up separate expense accounts that are only for your real estate related expenses. This again will make tax time much easier with everything already separated out. Again I just set up a separate expense category for each expense line on the Schedule E form.

    If you do add additional properties the difficulty then becomes tracking expenses for the individual properties. The only way I have found to do this is to create sub accounts for each Income and Expense that if for each property (i.e. Income:Rent:Property A and Income:Rent:Property B). This just adds lots of sub accounts. The benefit then becomes that you can create a custom report that will pull data from only the selected sub categories.

    The other option people have used is setting up the properties as Customers and the Expenses as Vendors. You can then run a Customer report that only pulls the data for the individual customer (property). I am not as familiar with this method as I haven't tried it yet.

    Good Luck and let me know how it goes!

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