mortgaging with gnucash

[Wiggins d'Anconia]

Maf. King wrote:
> On Thursday 23 Sep 2004 14:54, Andrew Gelvin Burley Grimes wrote:
> 
>>Hello --
>>
>>I am about to buy a house, and I was looking for some clarification
>>concerning some theoretical accounting issues.  I've been using gnucash
>>for a while, and everything runs smoothly, so this isn't a question
>>about operating gnucash per se.  I suppose it's really a question about
>>the double-entry accounting system.
>>Questions follow:
>>
>>1) When I take out this mortgage loan for the house, will I set up a
>>liability account for the house, and an expense account for the
>>purchase of the house as well, so that the first transaction concerning
>>the house will be to move (say) $100,000 from the liability account to
>>the expense account?  Or, will I actually just create the liability
>>account with an opening balance of $100,000, which will decrease as I
>>make monthly payments?
>>
>>2) So either way, I end up with this liability account containing the
>>amount of the house.  As I make payments, money will flow monthly from
>>my bank account to the liability account, which will steadily decrease,
>>right (I understand that I'll need to set up expense accounts for
>>interest and other associated costs).  How can I keep track of the
>>equity I build as time goes by?  Should I create a new asset account
>>that will contain the money that I have paid towards the mortgage
>>principle?  If so, how do I get the money into that account without
>>taking it out of the liability account for the mortgage (and thereby
>>increasing the balance of that account)?
>>
>>thanks for your thoughts
>>
>>Drew
>

IANAA either...

> 
> Hi Drew,
> 
> IANAA, but I would suggest that you have an asset account which reflects the 
> actual value of the house, a liability account for the mortgage loan, and 
> expense accounts for mortgage interest, legal costs and whatever else you 
> want.
>

The talk of putting the house in the asset column makes some sense to 
me, but doesn't it only take on that value if you were then to sell it? 
  It seems like the mortgage payments would be made against an equity 
account instead, because you don't *really* know what value the house 
has to be holding it in the asset side.  Or am I trying to think to hard 
about this?


> Assuming that you pay for the house partly with some of your own money, and 
> mostly with a mortgage, the opening value of the house asset is a transfer 
> from your bank account and from the liability account for the mortgage sum.
> 
> As you repay the mortgage, you do a transfer from bank -> expenses:interest 
> and liability:mortgage-loan
> 
> Not exactly sure how to account for the increase (hopefully!) in the value of 
> the house, but it is a matter of adding value to the asset account, possibly 
> a transfer from another income account?
>

This hits to my point above, there is no increase in the house value 
*until* you sell it.  Only at the time of sale do you know whether the 
house is an asset (made money) or liability (lost money), if the house 
sells for a gain you would take from the equity/asset, and transfer to a 
"capital gain" (appreciation, proper term??), bank (down payment), asset 
(2nd mortgage?), etc. depending on the terms of the deal.


> hope that doesn't add to your confusion!
> 

I am not trying to either, can an accountant step up to the plate?

> Maf.

Thanks,

http://danconia.org