A business uses journal entries in its accounting journal to record transactions, such as a home purchase. A journal entry increases or decreases various account balances. A business uses these balances to generate its financial statements at the end of each period. If your small business purchased a home, record a journal entry to adjust the accounts affected by the purchase.
Recording a Home Purchase
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If your small business used a mortgage for a home purchase, a journal entry affects the property, mortgage payable and cash accounts. If you paid all cash for a home, a journal entry affects the property account and the cash account. In a journal entry, you either debit or credit these accounts for certain amounts. Debits and credits can increase or decrease an account, depending on the account.
Property Account
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Add a home’s purchase price to the closing costs, such as commissions, to determine the home’s total cost. Write “Property” in the account column on the first line of a journal entry in your accounting journal. Write the total cost in the debit column. A debit increases the property account, which is an asset account. For example, assume you paid $290,000 for a home and paid $10,000 in closing costs. Add $290,000 to $10,000 to get $300,000. Write “Property” in the account column. Write “$300,000” in the debit column.
Mortgage Payable Account
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If your small business used a mortgage to purchase the home, write “Mortgage payable” in the account column on the second line of the journal entry. Write the mortgage amount in the credit column. A credit increases mortgage payable, which is a liability account that shows the balance you owe. For example, assume you used a $240,000 mortgage toward the $300,000 cost of a home. Write “Mortgage payable” in the account column. Write “$240,000” in the credit column.
Cash Account
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Subtract the mortgage from the home’s total cost to determine the cash used for the purchase. If you paid all cash, the cash used equals the home’s total cost. Write “Cash” in the account column of the next line of the journal entry. Write the cash used in the credit column. A credit decreases cash, which is an asset account. For example, if you used a $240,000 mortgage to buy a $300,000 home, subtract $240,000 from $300,000 to get $60,000. Write “Cash” in the account column. Write “$60,000” in the credit column.
Date and Description
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Write the date of the home purchase in the date column on the first line of the journal entry. Write a description of the transaction in the account column on the line below the last line of the entry. For example, if you bought the home on February 1, write “Feb. 1” in the date column. Write “Purchased home for $290,000 with $10,000 in closing costs” as a description in the account column.
