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Law Educator, Esq.
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A question for PaulMJD: "Would you pleases clarify why annual

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A question for PaulMJD:

"Would you pleases clarify why annual mortgage principal payments are not identified as expenses in CPA's audits of housing cooperative corporations?"
A mortgage principal payment (not interest or taxes) is merely a conversion of cash asset into real property asset, which is why it is not an expense of the cooperative. The value of the real property asset is still there and the principal payment converts to equity into the real property, so that principal payment does not really leave the cooperative, it is just converted from cash to equity. Debt represents amounts that a corporation owes, and that it must reimburse, but when that debt is converted to equity in the property there is no real cash income or expense it is just changed from the amount of debt owed to the lender to an increase in equity in the property owned by the association.

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Customer: replied 3 years ago.

PaulMJD: It wasn't you I had a conversation with on this subject it was MyVirtualCPA who replied: "Only interest is an expense because mortgage principal reduces debt, and therefore is a "balance sheet" "transaction. So I gather this agrees with what you say.

The problem I am having is that if mortgage principal payments are not included as a expense in annual audits, the net income/ (loss) for any year are always larger than they really are because the annual mortgage amount is not included as an expense, yet the total mortgage payment--interest and principal--are included as income. By not including mortgage principal as an expense of say $500,000, an annual net loss of say $200,000 gets changed to a net income of $300,000, and the whole financial picture is obscured.

Correct, that is what I said, what your CPA service said.

The equity should increase according to the amount of principal paid, so this is why the principal is not an expense. There is no loss of that money, it is translated to an increase in your available equity in the real property and that is where the principal would be accounted for.
Customer: replied 3 years ago.

But Paul the audit could show that an annual net income (before depreciation) is say $700,000 but if a mortgage principal of say $500,000 is not identified as an expense (somehow) the actual net income is only $200,000.


And if an annual net loss (before depreciation) of minus $200,000 is identified, because of not including a mortgage principal payment of $500,000, it would appear the corporation would have not an annual loss for that year of $200,000 but a net income of $300,000.

That is the common sense way people look at things, but that is not how the accounting principles work. You still have the asset of the money paid on your principal, that money has not really been lost, it reduced the principal on the mortgage and increased the equity. Equity is an asset and it can be borrowed against if needed.
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Customer: replied 3 years ago.

PaulMJD; Your words "That is the common sense way people look at things, but that is not how the accounting principles work." to me are worth their weight in GOLD. I'm going to have to use them to help shareholders understand what is going on.


Excellent as always......thank you PaulMJD.

Your association's assets are still there, you need to look at the reports to determine the increase in the equity in their property holdings to find them though. Point them to the equity information, which should be increasing and that should be increasing based on principal paid.
Customer: replied 3 years ago.

What if I find members' equity has not been increased?

The association's ownership interests and equity should have increased (of course based also on the ups and downs of the real estate market and value of the property) and if you cannot find that then you need to consider bringing a new accountant in to review the books.

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