Accounting - Income Statement Question

[Justin Klein]

Accounting Question for you CPAs.

So I recently purchased a rental unit and am just starting out.  I have one asset (single family home).  I do not use any accounting software at the moment as it is just one unit.  It may be easier if someone had a basic example they could share but here is my Income Statement question.

Revenue is clear as that is just your rental income or other revenue generators but I don't have anything else.  

Expenses Example:  For simplistic purposes let's say the house cost $100K.  I put $25K as a down payment. The monthly mortgage payment is $500 a month.  $300 or repairs and maintenance.

My current assumptions: 

- The $25k down payment is not an income statement expense as that is capital investment and would hit the balance sheet.

- The $75k remaining on the house is also just a PP&E item in the balance sheet that gets reduced by depreciation over time.

- The $300 of repairs and maintenance should be expensed.

- The $500 should be split into 1) Principal ($300), 2) Mortgage Interest ($150), 3) Escrow/Taxes & Insurance ($50).

- I assume the $300 of principal would only impact the balance sheet and not the income statement.

- I think the Mortgage Interest $150 and Escrow/Taxes & Insurance of $50 would be on the Income Statement as they are expenses that are not capital in nature?

Am I missing something here? What other basic income statement items should I be considering as it relates to the house (asset) purchase?

[Linda Weygant]

You've got it pretty well down.  My only nit to pick would be on the escrow payment.  Yes, technically the escrow is for taxes and insurance, but in reality it's a checking account.

In the event that you refi your mortgage, that escrow balance comes back to you because it is essentially your money held at the mortgage holder's office.

When I'm doing accounting, I transfer the escrow portion into a separate "checking" account.  Then, when the taxes and insurance are paid out of escrow, I record a "check" for those amounts.

Your escrow balance is set up to always have a higher balance in it than the insurance and taxes, so recording the entire escrow balance as an expense is always going to overstate those expenses.  Or you're constantly doing adjustments at year end for taxes.

Other income statement items:

HOA

Utilities

Advertising

Repairs/Maintenance

Property Taxes

Insurance

Bank Fees

Misc/Other

Essentially, just pull a copy of a Schedule E from the IRS website and copy those categories.

Balance Sheet items will be:

Capitalized Improvements

Equipment/Appliances

Mortgage Payable