How to Account for Interest Costs on Construction
The construction of commercial or large-scale residential properties can easily run into costs in the millions of dollars. Months or years of work may be required before the site is fully operational. While the building is under construction, no income is produced, so construction loans allow for the interest accrued on money funded for construction of business property to be paid by the loan itself. That interest is referred to as "self-funded interest" and is considered a capitalized cost of the building.
Other People Are Reading
Instructions
-
-
1
Create a self-funded interest account in the Asset section of the general ledger under "Building Costs." Self-funded interest is considered part of the cost of the building and is depreciated along with the building for accounting and tax purposes.
-
2
Record an increase to the construction loan payable account in the liability section of the general ledger when the bank increases your construction loan to pay the interest due on the loan. Generally accepted accounting principles (GAAP) refers to an increase to a liability account as a "credit."
-
-
3
Record an increase to the self-funded interest account for the amount of interest paid by the loan increase. GAAP refers to an increase in an asset account as a "debit."
-
1
Tips & Warnings
If you are not certain how to properly account for self-funded interest or construction loans and expenses, consider hiring an accountant to assist you with proper setup of your accounting books.
