Escrow payments made by bank not noted for previous years

You should separate escrow from the mortgage to avoid incorrect balance reductions. Create an Other Current Asset account for escrow instead of making it a sub-account of the mortgage. When recording mortgage payments, split the principal and interest to the mortgage liability account, and escrow to the escrow account.

To fix past years, use a General Journal Entry (GJE). Debit the mortgage liability account to restore the correct loan balance. Credit the escrow account (or another appropriate account) to adjust the funds.

Use correct historical dates for accuracy. If this impacts tax reports, consult an accountant. Going forward, always split payments properly to keep records accurate.

@mgspoden 

Is your mortgage loan payable understated by the amount of the escrow sub-account?  If so, the correct journal entry is a debit (increase) to your escrow other current asset (OCA) account and a credit (increase) to the escrow sub-account for the balance in the sub-account.  That will reclassify the amount in the sub-account to the escrow OCA and increase the balance of the mortgage loan payable.  When you make an entry to the sub-account, the parent account will increase.  You don't need to make a separate entry to the parent account.