If you are a small business that engages in speculative home building, then you probably also have access to that speculative home’s construction escrow account (from a previously arranged loan agreement).
Since the building of a speculative home will be financed by a lender (such as a bank), you, as the home builder, will need access to those funds when the need arises.
The bookkeeping for tracking all of this must also be maintained by the home builder as well, that way the home builder can budget exactly the usage of these funds until, most likely, depleted.
A construction escrow loan will typically be treated much like a typical mortgage type of loan that you will see on a H.U.D. settlement statement.
Here is a typical and simple journal entry for booking a very basic construction escrow loan, let’s say, for $260,000:
- Credit: Principal balance of the loan for $260,000. This will be a Liability in your books.
- Debit: Settlement (closing) costs for $2650.
- Since this is a Spec type of home we are building, the closing costs will not be expensed until the home actually sells on the market some day. So these settlement costs will be capitalized in your books for now. Perhaps you can capitalize this to a Construction in Progress type of Asset account.
- Debit: Remaining Balance to Draw for $257,350.
- This remaining balance to draw is really your Construction Escrow loan that you will be drawing funds from. This account will be an Asset type of account. Note: As you draw funds, when needed, from this account, then this Asset account will gradually get smaller and smaller.
It is always a good idea to reconcile your construction escrow accounts as often as possible, especially if you are engaged in building multiple speculative homes simultaneously; this is very important for budgetary reasons and understanding how much cash is tied in to your investments. Also, when you sell some day and perhaps file your tax returns, you don’t want any surprises resulting from ill-managed construction escrow loan bookkeeping.
Note: AccuraBooks is a bookkeeping firm only, so please consult with your C.P.A. for verification and clarification about the contents of this article.