Is Mortgage Payable a Liability in Accounting?
Gain clarity on how mortgage payable functions within financial accounting, its classification on financial statements, and its evolving nature over time.
A mortgage payable is a liability in accounting. It represents a significant financial obligation that impacts an entity’s financial position.
Understanding Liabilities in Accounting
A liability represents an obligation or debt owed by an entity to another party that must be settled in the future. These obligations arise from past transactions or events and require a future outflow of economic benefits, typically in the form of money, goods, or services. Common examples include loans, accounts payable (money owed to suppliers), and accrued expenses like unpaid wages or taxes.
A mortgage payable is a debt incurred to acquire property, such as a home or commercial building. This debt is owed to a lender, such as a bank, and requires regular payments over an extended period. The agreement to repay the borrowed funds, along with interest, creates a present obligation that will result in a future economic sacrifice.
Mortgage Payable on the Balance Sheet
The balance sheet provides a snapshot of an entity’s financial position at a specific point in time, detailing its assets, liabilities, and equity. Mortgage payable is recorded within the liabilities section of this statement. It is considered a long-term liability because its repayment period extends beyond one year.
For financial reporting purposes, the mortgage payable is divided into two portions: current and non-current. The current portion represents the principal due within the next 12 months from the balance sheet date. This amount is determined by reviewing the loan’s amortization schedule. The remaining principal balance is classified as the non-current or long-term portion. This distinction helps users understand the entity’s short-term and long-term obligations.
How Mortgage Payments Affect the Liability
Each mortgage payment consists of two components: principal and interest. The principal portion directly reduces the outstanding balance of the “Mortgage Payable” liability on the balance sheet.
For example, if a business has a $238,000 mortgage and makes monthly payments where $3,000 goes towards the principal, the mortgage liability decreases by that $3,000 each month. The interest portion of the payment is recognized as an expense on the income statement and does not reduce the liability itself. This interest compensates the lender for providing the funds and represents the cost of borrowing the money.