Is Mortgage Payable a Debit or Credit?
Clarify the accounting treatment of mortgage payable. Explore the core principles of financial record-keeping for liabilities.
Clarify the accounting treatment of mortgage payable. Explore the core principles of financial record-keeping for liabilities.
A mortgage payable represents money owed by a borrower to a lender, typically secured by real estate. Understanding how these obligations are accounted for requires familiarity with the basic principles of debits and credits, the language of financial record-keeping. This article clarifies whether a mortgage payable is recorded as a debit or a credit and explains the accounting reasons.
Debits and credits are the foundational elements of the double-entry bookkeeping system, which ensures that every financial transaction impacts at least two accounts. Debits are entries recorded on the left side of an account, while credits are entries on the right side. This dual recording system maintains the balance of the accounting equation: Assets = Liabilities + Owner’s Equity.
The nature of an account dictates whether a debit or credit increases or decreases its balance. Asset accounts, which represent resources controlled by a business, increase with debits and decrease with credits. Conversely, liability accounts, representing obligations owed to others, increase with credits and decrease with debits. Owner’s Equity accounts, reflecting the owner’s stake in the company, also increase with credits and decrease with debits.
Revenue accounts, which increase owner’s equity, typically have a credit balance. Expense accounts, which reduce owner’s equity, normally have a debit balance. The balancing act between debits and credits ensures that the accounting equation remains in equilibrium after every transaction.
A mortgage payable is categorized as a liability account. This classification stems from its nature as a financial obligation owed to another party, such as a financial institution. This debt arises from borrowing funds, secured by real estate, that must be repaid over an extended period.
The obligation to repay the borrowed principal and associated interest makes it a liability on the balance sheet. It signifies a future outflow of economic benefits to settle a present obligation. Mortgages are typically long-term liabilities, often spanning 15 to 30 years, though a portion due within the next 12 months is classified as a current liability.
Given that mortgage payable is a liability account, an increase in the amount owed is recorded as a credit, while a decrease is recorded as a debit. This follows the normal balance rule for liability accounts. When a new mortgage is taken out, the amount borrowed increases the mortgage payable balance.
For example, if a company secures a $500,000 mortgage to purchase a building, the cash account (an asset) would be debited for $500,000 to reflect the increase in cash. Concurrently, the mortgage payable account (a liability) would be credited for $500,000, demonstrating the increase in the obligation. This dual entry ensures the accounting equation remains balanced.
When a mortgage payment is made, a portion of the payment reduces the principal balance of the mortgage payable. This reduction is recorded as a debit to the mortgage payable account. For instance, if a $3,000 principal payment is made, the mortgage payable account is debited for $3,000, decreasing the liability.
The cash account (an asset) would be credited for the total payment amount, which includes both principal and interest. The interest portion of the payment is recorded separately as an interest expense, which is typically debited as it decreases owner’s equity. Therefore, each payment decreases the liability through a debit and reduces cash through a credit, while also recording the interest expense.