How should a mortgage loan payable be reported on a classified balance sheet?

A classified balance sheet reports current liabilities separately from long-term liabilities. Usually, a portion of a mortgage loan balance will be a current liability and a portion will be a long-term liability. The principal that will be due within one year of the balance sheet’s date is reported as a current liability. The principal that will be due after one year of the balance sheet date is reported as a long-term liability.

To illustrate, let’s assume that on December 31, 2005 a company has a mortgage loan payable with a principal balance of $400,000. During the year 2006 there will be twelve monthly payments due and each payment is $4,000—for a total of $48,000. The $48,000 to be paid in 2006 consists of $28,000 of interest payments and $20,000 of principal payments. On the company’s December 31, 2005 balance sheet $20,000 will be reported as a current liability, Mortgage Loan Payable—Current Portion. The remaining $380,000 of principal will be reported as a long-term liability, Mortgage Loan Payable—Noncurrent Portion.

Future interest payments are not reported as liabilities. Interest is reported as a liability only after the company incurs the interest expense. For example, let’s assume that the company’s mortgage payments are made on the 28^th of each month. On December 28, 2005 the company made its mortgage payment that included the interest through December 28, 2005. On the company’s balance sheet dated December 31, 2005 a current liability will be reported for the interest incurred on December 29, 30, and 31, 2005. (The interest for the year 2006 is not a liability as of December 31, 2005.)

Learn more about the Balance Sheet.