loan question

NMO

We started a construction loan in 2020. We were given the money as we needed it. The loan was finalized in March of 2021. I made interest payments each month but May was my first official payment. So how do i document the money received for the loan in 2020 and 2021? In the right catagory.

Tom Young

"So how do i document the money received for the loan in 2020 and 2021? In the right catagory."

Assuming that you're were building a house or other piece of real estate and want to show this new asset on your balance sheet, then ultimately all that money, along with any other money you borrowed or spent from your savings, will end up is some asset Account on your balance sheet.  There isn't any necessity to use Categories here, though there are ways to do this. 

Why no "Categories?"  Because Categories are for "period expenses", i.e., costs that you don't expect to recover, cost that will show up in a Spending report with their concomitant reduction of your net worth.   You presumably weren't borrowing money to ultimately reduce your net worth, you were borrowing money to build a new asset - that house or whatever - that has a value at least as much as every dollar you put into it.

(I assume you drew money from the loan that was deposited in your checking Account, from whence you paid for labor and material.)

The draws against the construction loan are easy enough:

Debit (increase) Checking Account $XXX
Credit (increase) Construction Loan Account $XXX

The money you paid out from this loan (and other resources) are also easy enough:

Debit (increase) New "House" Asset Account  $XXX
Credit (decrease) Checking Account  $XXX

That's the super-simple, and correct, accounting for your activity.

If you want to keep better detail of how this money was spent, there's a couple of ways of doing this. 

If you do your accounting in the super-simple way above, you could add Tags for each expenditure, like "foundation", "framing", "roof", "plumbing", "electrical", "permits", "engineering" and the like  This will allow you to track what each house component cost.

You could also use Categories to keep track of all your costs and either transfer all these costs to your new asset Account either at the end of the project or monthly.  In this case you could use a "contra" construction" Category where you make a negative entry for all the costs incurred over the project's duration or the end of each month.  This entry would result in the costs having no net effect on your Spending report - all the costs incurred would be zeroed out with the dollars in the contra Category - but all the cumulative costs would always be available to you by using a suitable spending report.

There's no "cookbook" as to exactly how you're "supposed" to keep track of money spent to build a new asset beyond the super-simple method outlined above where all that money ends up in an asset Account.  That accounting is perfectly correct, but ultimately less useful, than documenting expenditures using Tags and Categories or even both.You create these Tags and Categories as you see fit.

NotACPA

Well, I'd set up a HELOC type loan  for the initial portion, because unlike a regular "Loan" type account you can take additional "Draws" against it and make regular or irregular payments.  You CAN if you wish set this account for download, but since it's function  appears to be completed I wouldn't bother with that.

IF the new portion is a fully amortized loan, I'd create a new loan  account for it and use the  Opening Balance in this account to pay off that HELOC.

In the new account, use the Loan Wizard  to setup the regular payment, and amortization.  Do NOT set this account for download since doing so will eliminate all other options that you'd otherwise have to manage the account.

Tom Young

"So how do i document the money received for the loan in 2020 and 2021? In the right catagory."

Assuming that you're were building a house or other piece of real estate and want to show this new asset on your balance sheet, then ultimately all that money, along with any other money you borrowed or spent from your savings, will end up is some asset Account on your balance sheet.  There isn't any necessity to use Categories here, though there are ways to do this. 

Why no "Categories?"  Because Categories are for "period expenses", i.e., costs that you don't expect to recover, cost that will show up in a Spending report with their concomitant reduction of your net worth.   You presumably weren't borrowing money to ultimately reduce your net worth, you were borrowing money to build a new asset - that house or whatever - that has a value at least as much as every dollar you put into it.

(I assume you drew money from the loan that was deposited in your checking Account, from whence you paid for labor and material.)

The draws against the construction loan are easy enough:

Debit (increase) Checking Account $XXX
Credit (increase) Construction Loan Account $XXX

The money you paid out from this loan (and other resources) are also easy enough:

Debit (increase) New "House" Asset Account  $XXX
Credit (decrease) Checking Account  $XXX

That's the super-simple, and correct, accounting for your activity.

If you want to keep better detail of how this money was spent, there's a couple of ways of doing this. 

If you do your accounting in the super-simple way above, you could add Tags for each expenditure, like "foundation", "framing", "roof", "plumbing", "electrical", "permits", "engineering" and the like  This will allow you to track what each house component cost.

You could also use Categories to keep track of all your costs and either transfer all these costs to your new asset Account either at the end of the project or monthly.  In this case you could use a "contra" construction" Category where you make a negative entry for all the costs incurred over the project's duration or the end of each month.  This entry would result in the costs having no net effect on your Spending report - all the costs incurred would be zeroed out with the dollars in the contra Category - but all the cumulative costs would always be available to you by using a suitable spending report.

There's no "cookbook" as to exactly how you're "supposed" to keep track of money spent to build a new asset beyond the super-simple method outlined above where all that money ends up in an asset Account.  That accounting is perfectly correct, but ultimately less useful, than documenting expenditures using Tags and Categories or even both.You create these Tags and Categories as you see fit.

NMO

ok, couple of question.
I didnt do this at first. I am debittilng the checking acct with the deposit. How do I credit the construction loan acct "if i set the acct up this year with the total of the loan. How do i go back and correct it. Because i previously showed the loan as a miscellaneous income, but now i see it should possibly not been income. Am I correct?

Tom Young

@NMO

Borrowing money is never any form of "income."  The "other side" of borrowing money, (i.e., the deposit to your checking Account), is an increase in a liability, a loan of some sort. 

Since construction loans don't amortize you could/should create either a generic "liability" Account or use @NotACPA 's suggestion of a HELOC loan.  Now, go back to each debit to your checking Account that came from that loan and in the Category box delete that Misc Inc Category and substitute instead the name of the loan Account, surrounded by square brackets, e.g., [{Name of new loan Account}].  With each changed deposit you'll see the loan balance increase and when you're done, hopefully, the balance in the loan Account will be correct.

(If, for whatever reason, some interest expense, fees, etc. got capitalized into the construction loan you should account for those inside the loan Account itself, e.g.,

Debit (increase) Construction Loan Interest Category   $XXX
Credit (increase) Construction Loan Account                $XXX)