How to Categorize Promissory Notes
TonySouth
Member Posts: 1
I purchased a building and the seller offered to finance. We did a promissory note with a fixed 8-year term at 0% interest. (family member purchase). How would I set this up in Wave so that I can record my monthly payments, and reduce the balance owing for that note with each payment? I'd still like for my monthly payments to show up on my P&L if possible so I can get an accurate expense picture. Thanks in advance!
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@TonySouth,
Payments of principal are not an expense. You recoup your cost (expense) through depreciation deductions. 27.5 years for residential or 39 for commercial. To get the building in Wave use a journal entry.
Debit- Building
Debit - Land
Credit Loan Payable
Credit Owners Equity
You will need to create these in the Chart of Accounts. Go to Accounting/Chart of Accounts
Building and Land would go under Property. There is also a spot for accumulated depreciation. Might as well create. Go to liabilities and create a long term liability (assuming repayment is greater than 1 year). Credit owners equity for any amount that you have invested.
So lets say the building was sold to you for 300k. Local assessor says land is worth 60k. You gave Uncle Fred 20k and he took back a note for 280k. Your entry would look like this
Debit Building 240K
Debit Land 60K
Credit Loan - Uncle Fred 280
Owner Equity 20K
Now when you pay him back, you would classify the payment to the loan. Since there is no interest, every payment reduces principal dollar for dollar.
Awesome @Mikeg!