Many churches set aside money specifically for the repayment of loans, such as a mortgage. These churches may even take up special collections where the money collected is reserved for the purpose of this loan repayment, and that money is tracked in a Dedicated account. When it comes time to use that money, due to the way that debits and credits are laid out between liability accounts (used to track the balance of a loan) and dedicated accounts, it isn't possible to do a direct transaction between the two to pay the loan, so a different approach is needed. This article presents two possible paths for using a dedicated account to pay for a loan.
Method 1: Reclassifying Dedicated Money as Income
In this first approach, in order to make the debits and credits work properly, a set of two transactions would need to be made each time a loan payment is made.
Transaction 1: Moving the full value of the loan payment from a dedicated account to an income account:
This first transaction, a journal entry, is needed, as the balance of the dedicated account needs to be reduced to show that there is less money reserved for the repayment of the loan, and since that can't be done in the payment since we also need to reduce a liability, transferring the balance of the payment to income represents a decrease in the dedicated account, while not reducing your asset account yet:
Transaction 2: Standard Loan Payment
This transaction shows a typical payment of a loan, where it is broken up into three lines: the portion that goes against principal as a Liability, and the portions that go against Interest and Escrow as an expense:
Method 2: Transferring Dedicated Balance to Equity
The second method involves the use of an Equity account to show the ownership your church has over the asset you took out the loan for. This Equity account will remain on your chart of accounts, even after the loan is paid off. This method involves two transactions.
Transaction 1: Making the Loan Payment
The First transaction will involve making a Standard Loan payment, as seen in step 2 of the previous method. This will reduce your liability for the loan (liability) and increase the expense accounts for both loan interest and escrow:
Transaction 2: Moving Principal to Equity, and Expenses to Dedicated
The second transaction will involve a journal entry that takes the principal of the loan payment and moves it into the equity account you created for the asset to show ownership in that asset, and it moves the expenses you put in under an expense account for Escrow and Interest into the dedicated account, reducing the balance for those as well: