I recently received a question from R.C.
After reading your book How to Use Quickbooks for Rental Properties, I have a question about escrow accounts.
I set up a mortgage payment of $5300 a month. $4400 is principal and interest and $900 goes to an escrow account to pay taxes at the end of the year. When I look at the escrow account the payments show as debits and the balance is a negative number. At the end of the year I do a transfer from the escrow account to the bank account and then pay the property taxes? The transfer from the escrow account shows up a credit. Can you help me understand why this is from an accounting point of view?
Great question. Why is the escrow account balance negative? I predict it is the wrong account type. Also, probably you are writing your mortgage checks something like this:
The key is what type of QuickBooks account is the Escrow Account? Is it a liability, an expense, or an asset? Because you are accruing money in there that you will later use to pay an expense, it is an asset you own. Thus, in QuickBooks create it as an Other Current Asset account type.
When you do it this way, you will have the correct balance for your escrow. (If it were a liability account, it would show a negative balance).
At the end of the year, you can record a Journal Entry for your total taxes paid from the escrow account, making sure to also record classes in all the line items.
It is likely you would actually have several line items on this journal entry. One for each property. You have a choice to also create sub-accounts for each property under the escrow account. Generally that is not needed, but if you want it is an option for more reporting granularity.