How to Calculate Mortgage Payable in Accounting
Mortgage payable is a long-term liability because the obligation becomes due in more than one year. A mortgage arises when a company finances the purchase of land or a building. When a business takes out a mortgage for a property, the company must pay the principal on the mortgage loan plus interest. A company incurs interest each month until the mortgage is paid off completely. The early payments on a mortgage involve more interest than principal, but the amount applied to the mortgage principal increases over the life of the loan, as explained by the CliffsNotes website. A company must make monthly mortgage payments until the obligation is satisfied.
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Instructions
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Verify the principal amount of the mortgage. The principal amount of the mortgage indicates the amount of the loan used to acquire possession of a building or land. For example, assume a company acquired a mortgage that has a $200,000 principal.
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Confirm the interest amount of the mortgage. The interest rate of the mortgage indicates the company’s cost to take out the mortgage. Assume a company has to pay 8 percent interest on a $200,000 mortgage. In this scenario, the company must pay $16,000 in interest per year. That means the company has to pay $1,333 in interest for the first mortgage payment.
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Check the company’s monthly mortgage payment. Assume a company pays $2,000 every month for the mortgage. If the company has $1,333 to pay in interest, $667 of the first mortgage payment will be applied to the principal.
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Subtract the amount paid on the mortgage principal from the principal balance. This allows the company to calculate the amount paid on principal and the amount of the next interest payment. For example, subtract $667 from $200,000, which equals $199,333 and is the balance carried forward to the next month in the accounting ledger. For the next month, multiply 8 percent by $199,333 to find the interest payment for the year. Divide the total by 12 to determine the interest expense for the month. In this scenario, the company must pay interest expense of $1,328. If the company pays $2,000 per month for mortgage, $672 is the amount the company will pay on the principal of the mortgage loan for the second month, and $198,661 is the balance carried forward in the ledger. Repeat this process every month to calculate mortgage payable.
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