How to Account for a Construction Loan and then Selling the House?
Hello
I'm trying to figure out the best way to handle the accounting for taking out a construction loan to build and then selling the house in QB Desktop Premier Contractor 2020.
Here's how we do it currently:
For the purposes of this example, let's assume there are no overhead expenses or any other projects.
We get a construction loan for $250,000, so I set up an "Other Current Liability" account called "House 1 Loan" with opening balance of $0. When we receive loan disbursements from the bank for each draw, they are deposited to our company bank account and the "From Account" is the "House 1 Loan" Liability account I made. So when we finish building the house and receive the final loan disbursement, then the "House 1 Loan" account balance is $250,000.
As we get Bills from Vendors, they are entered the same as any other Bill. For example when we buy $10,000 of lumber, it is entered as a Bill from "Lumber Company" with an Expense Account of "Construction Materials". Then we pay the Bill with a Check from our bank account. There's no reference to the Liability account in either the Bill or the Check. Let's say our total expenses like this add up to $270,000.
When we sell the house for $300,000, I make a Deposit to the company bank account where the first line item is From Account "Sale of House" which is an Income account with the amount of $300,000. The next line item is From Account "House 1 Loan" with amount -$250,000. This sets the Liability account to $0, and the total of the Deposit to $50,000, which matches the amount of the check we receive at settlement.
So now we have Income of $300,000 and Expenses of $270,000, for a profit of $30,000 on this Job.
Does that all sound correct?
Then, if all of the Expenses were incurred last year but the house is sold this year, that means we would show a $300,000 profit this year even though only $50,000 actually entered our bank account, and the total profit of the job was $30,000, right? The $250,000 loan payoff doesn't affect our profit in any way? And the $270,000 of Expenses already reduced the previous year's profit.