Q&A: Escrow Account for Mortgages

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:

escrow check payment for bank loan

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.

other current asset escrow quickbooks

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).

transactions by account

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.

pay property taxes from escrow quickbooks

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.

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Opening Balance Equity Account Explained

opening balance equity quickbooks Opening Balance Equity is an account that QuickBooks automatically creates under certain circumstances, most commonly when creating a new account and setting an opening balance.

How does Opening Balance Equity get a balance?

The following screenshot someone created a new checking account and set the opening balance here. That seems tempting, but it just defers the real work. (Later you’ll need to zero out Opening Balance Equity and record the actual account that gave this new account the opening balance.) The money came from somewhere else, so read below for the preferable way to enter all opening balances.

new account creates opening balance equity

It is an equity account, which means it sits alongside Owners Equity, Retained Earnings, Capital Stock, etc. You can see the current balance by looking in the Chart of Accounts, or click Reports > Company & Financials > Balance Sheet Standard.

opening balance equity balance sheet report

When Opening Balance Equity has a non-zero balance, you need your accountant to make end-of-year adjustments into other balance sheet accounts and zero it out.

How do you adjust Opening Balance Equity to zero?

It could be as simple as a two line item journal entry from Opening Balance Equity to the actual balance sheet account that “funded” the opening bank account balance. Generally, it is one journal entry, just sometimes many accounts are involved.

Other times it is not that simple. There may be multiple sources of the Opening Balance Equity balance. And it takes your accountant’s help to correctly allocate them to the right accounts depending on which owner contributed them and whether they happened in the current, or a prior, year.

If you only entered the beginning bank balance during the set up of the bank account in the chart of accounts, you may have a simple fix. Quickbooks automatically offsets the amount in the Opening Balance Equity account. Since the beginning amount is generally from prior period activity, do a Journal Entry to retained earning to zero out the Opening Balance Equity. It could be that simple. Or, it could need to go to the member’s Equity account, or split among several owners.

Recommended steps for creating a new company file, preventing any Opening Balance Equity.

Thanks to fellow QuickBooks ProAdvisor Laura D. for sharing what she does with a new company file and existing data:

  1. If you have an accurate trial balance from a previous month/year, enter it as one journal entry. (Do not enter any opening balances when setting up new accounts in the chart of accounts.)
  2. Start your journal entry with a blank line.
  3. For the Checking account, enter only the reconciled bank statement amount in that journal entry.
  4. Enter all other Balance Sheet accounts except Accounts Payable and Accounts Receivable.
  5. Enter your Profit & Loss accounts.
    1. If you want your income/expenses by class, you can enter each year-end amount on a separate line in order to attach the class to it. (Following our training, you will want to do this for each property’s class).
    2. If you want your income/expenses by job, you can enter each year-end amount on a separate line in order to attach the job name to it. (As landlords, you don’t want to do this).
  6. Let the variance hit Opening Balance Equity.
  7. Then, enter any outstanding checks/deposits and hit Opening Balance Equity. (Use the write checks/make deposits windows).
  8. Then, enter Unpaid Bills and Open Invoices, one at a time with the vendor/customer name, offsetting Opening Balance Equity. (Use the enter bills/create invoices windows – you will have to set up an item which points to Opening Balance Equity for the invoices).
  9. When you complete these three steps, your Opening Balance Equity should be zero.

This will give you the detail of outstanding checks/deposits so that you can reconcile next month’s bank statement.

This, also, will give you an accurate A/P and A/R with enough detail to move forward in paying bills and receiving payments.

Hopefully, the LandlordAccounting.com blog is helpful to you. Read more, or order our full training for Landlords in QuickBooks today.

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How to Import the Sample Company and Template File (QuickBooks Online Instructions)

Previously, we explained for Windows and Mac users how to import the training files you purchased. Now, we break it down for users of the Online versions of QuickBooks.

Step 1. Email us requesting the online edition data files. They are not currently in the members only area because most customers still use the desktop versions of QuickBooks.

Due to QuickBooks Online limitations, you must use Windows and Internet Explorer for importing. Read more about how to work around this if you only have a Mac.

Step 2. Log into QuickBooks Online. It is important to note that having multiple online company files requires multiple subscriptions. With only one subscription, you can create and delete many company files, trying new things each time. But, you may only have one active company at a time, and delete any existing company file so you can import the sample company.

If you must delete an existing company file, here’s how:

Log into your old company and click the dropdown in the top right. Go to My Apps.
go to my apps to cancel quickbooks online to create a new company file

Go to the Manage My Apps tab and click Cancel subscription.
confirm to cancel quickbooks online to create a new company file.jpg
Confirm you want to do this.
Cancel Subscription - YourCompany, LLC Sample Company File - QuickBooks Online Essentials-1

Then go to http://quickbooksonline.intuit.com/ to sign up for a new account, at whichever cost level you want. (Try the free trial to learn if it will work for you.) For more help deleting and creating a new company, read this. (If you are paying, you won’t have to pay any more because this new account will replace your previous account).

Step 3. Logged into a brand new QuickBooks online company file, choose to Import QuickBooks Desktop Data.

import quickbooks desktop data

Upload the the special online edition file that we gave you. When prompted, if you want to view sample transactions, choose to import everything, if you want a template just import the lists.

You may need to wait a short while once you imported the file before it is available to use. Check for an email from QuickBooks when your file is ready. When it is imported (it only took a few minutes for us), explore all of the data and transactions you now have.

quickbooks online after landlordaccounting import

When it is time for you to create a real company file, you can erase all this data, or go through the import process again. Questions about landlording and QuickBooks? Contact us, we’re glad to chat.

Want to start learning today with our custom landlording training? You can buy our full training with hundreds of pictures explaining everything.

Entering Landlords’ Historical Transactions in QuickBooks

If you are starting a new QuickBooks company file for an existing company, you probably want to enter all those old transactions from the company into QuickBooks so that you can track current performance versus the past. For many landlords’ businesses, this is the right approach, and we will present two methods to quickly enter these historical transactions.

But for other businesses (especially the very small) it may make sense to cut over to use QuickBooks and leave historical reporting in your old system (Quicken, Excel, etc). If you create summary reports and some spreadsheets you can get a lot of the benefit of comparison, but less effort in migrating the data.

Forms method to ender historical transactions in QuickBooks

First, you can re-enter every transaction using the forms and windows you would normally. (Create invoices, receive payments, etc.) This is a great way to learn how to enter new transactions into QB’s. We recommend it for everyone to try, even if only to scrap that company file, as you learn much about how to do property management in QuickBooks by entering actual transactions.

If you do this, the order you enter the transactions is important, do it in the following order.

Enter Accounts Receivable in this order:

  1. Invoices
  2. Statement Charges
  3. Cash Sales
  4. Returns
  5. Customer Payments
  6. Deposits of customer payments sales tax payments

Enter Accounts Payable in this order:

  1. Bills
  2. Credits from vendors
  3. Bill Payments

Enter historical payroll txns.

Enter bank and other txns in the following order:

  1. Checks (do not duplicate bill payments)
  2. Deposits (do not duplicate customer deposits) bank fees and transfers
  3. Credit card transactions

Reconcile each bank account for each month as you go. Getting each month perfect will save a lot of time versus having to reconcile many months at once.

Summary journal entry method (“monthly rollup transactions”) to enter historical transactions in QuickBooks

This method is more useful for quickly entering your transactions, but only gives transaction data on a monthly rollup level.

Enter all historical transactions by creating a summary journal entry for each month between the start date and current date. Each entry will have the net impact of the month: rent receipts, maintenance (per property/class), capital investments per property’s asset account, owner draws, etc. You can enter in on the first of the month, for all transactions that happened each month.

Remember, even though this is not entirely accurate, it gives you a granularity that enables year over year monthly comparisons. For some people this is helpful enough, and potentially faster to calculate these net transactions from their old system than enter everything individually.

Reports to verify correct entry of old transactions into QuickBooks.

There are several reports you can run after migrating the data to ensure your new company file has the correct information.

  1. Run a Balance Sheet report as of the start date to verify beginning account balances.
  2. Generate a Profit and Loss report for periods since start date to verify historical transactions.
  3. Create an Open Invoices report and verify accounts receivable as of the start date.
  4. Use the Unpaid Bills report to verify accounts payable details as of the start date.
  5. Verify inventory by running inventory valuation summary report (probably not applicable for rental property companies).
  6. Run the Payroll Liabilities report to verify payroll liabilities detail as of the start date.
  7. Use the Payroll Summary report to check year-to-date payroll transactions.

We hope this helps, remember at Landlord Accounting you can learn more about tracking rental properties in QuickBooks and invest in our training.

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