 Hello and welcome to the session in which we would look at current liabilities part 2 of 4. In this session we will discuss additional current liabilities that we did not look at in the prior session. In the prior session we looked at accounts payable as well as notes payable. In this session we would look at the following liabilities, dividend payable, customer advances and deposit, unearned revenues, sales taxes payable and in income taxes payable. Now the first thing you want to understand is what is a current liability. We also covered that in the prior session. This is the slide that I spent a few minutes on explaining in detail what a current liability is. So if you haven't looked at part 1 please go back and look at part 1. In this session we're going to dive right into dividend payable so on and so forth. Starting with dividend payable what is a dividend payable? Well it's a current liability but what is that? What is dividend payable? Well what is dividend? Dividend is the company's distribution of the profit to shareholders. Simply put every year the company makes a profit. They generate revenues and expenses. The revenues and expenses are close to retained earnings through net income. So once the company generates revenues minus expenses net income will increase retained earnings. At some point the shareholders they would like to receive a portion of that profit. That profit is paid out in dividend and this is what dividend is. Dividend comes out of retained earnings as part of the distribution to the shareholders as part of the profit. Now when is the dividend distributed? Well the board of directors, the people in charge of the company, the shareholders voted those board of directors. They declare, they decide that a dividend will be paid. Once they make declaration the dividend becomes a liability. So once they do so it becomes a liability and within maybe a month, month and a half max they will pay off the liability. So when it comes to dividend we need to be familiar with three dates that are related to dividend. The first one is when the board of directors declare the dividend. So date one is called the date of declaration. Once the board of directors declares the dividend then the dividend becomes a liability. Not all companies pay dividend. By the way we're going to be talking more about dividend in a separate session when we talk about equity but simply put we are talking about dividend payable and let's assume for the sake of illustration the board of directors they decided to pay one million dollars out of the profit. We don't know what the profit is but it has to be more than a million. They're going to pay one million. At this point we debit retained earnings and this is what I just did and we credit dividend payable. Now we have a liability called dividend payable and this is the current liability. Why is it a current liability? It's because it's going to be paid pretty soon. The second date that's important that's related to dividend is date of record. On date of record we don't make any entry. On the date and on the date of record we review the shareholders name, addresses, social security and whether they own the stock on that date. For example the date of declaration could be December the 7th 2022. The date of record could be December the 20th 2022. What does that mean? It means you have to own the stock on that date. That's all we have to know. If you own the stock you're going to get the dividend. Then we have the date of payment and as the name suggests it's the date that we actually make the payment and when we make the payment we are going to reduce our dividend payable a million and this becomes zero. We reduce the liability and obviously we paid cash, we credit cash a million dollar. So this is the first current liability that's called dividend payable. The second liability we're going to be looking at is unearned revenues. This is actually a good liability unearned revenues and we're going to see why. Now bear in mind unearned revenues they could be shorter or long term. They're usually short term but you could have unearned revenues long term, long term liabilities. What are unearned revenues? Well or sometimes they're called inserting textbook or CPA review courses the third revenues. Well it's when we receive payment in advance of delivering goods or services. What happened is the customer pays us the money. We have the money but we have not delivered the service yet. Well as a result it's not a revenue remember until you deliver the service. Simply put what type of business they will have this type of liability. Well magazine subscription, airline companies, sports event when you buy tickets in advance, hotels, concert, etc. Anytime you can think of you paid for something and you receive the benefit later that's basically unearned revenue for the company. For you it's a prepaid. You prepaid for it for them it's unearned revenue. So let's assume your favorite team sold 10,000 season football tickets at $100 each for its 10 games 10 game home schedule in advance. So what's going to happen is they received a million dollar in advance which is 10,000 tickets times $100. They debit cash but they will credit unearned or the third revenue of a million dollar. Simply put this is the liability. All what they have to do now is play the games to start to earn the liability to start to earn exactly to start to earn the liability. We received a million dollars for 10 games so as we play each game as each game is played we can recognize we can reduce our unearned revenue by 100,000 and increase sales revenue by 100,000. So simply put when we started this unearned revenue we had a million now after the first game we debited the account 100,000 we still have 900,000 to earn or nine games to play. Let's take a look at customer advances and deposits. What are what are customer advances and deposits? Those are returnable cash receipt received from a customer's and employee as a result of guarantee of the performance of a contract maybe security deposit those could be also current or non-current. What does that mean? It means the customer pay a certain amount of money to utilize your asset but you're going to give them back this money once they return the asset. Why would you do so? Just in case there is any damage to the asset in case they never return the asset so on and so forth. The best way to illustrate this is to actually look at an example. Before we look at an example let me just remind you whether you are an accounting student or a CPA candidate to strongly suggest you take a look at my website farhatlectures.com I don't replace your CPA review course nor I replace your accounting course all what I all what I can do is I'm a useful addition to your CPA review course or to your accounting studies. I explain the material differently I provide you with additional resources multiple choice through falls and additional exercises and lectures your risk is one month of subscription you could give it a try you like it you keep it you don't like you cancel your potential gain is making your accounting career much easier for yourself if not for anything take a look at my web website to find out how well or not well your university doing on the CPA exam this is a list of all the accounting courses that I provide resources for basic accounting governmental advanced accounting intermediate accounting auditing tax so on and so forth my CPA supplemental resources are aligned with your becker wiley gleam roger so it's very easy to go back between my material and your CPA review course I also give you access to all previously AI CPA released questions almost 1500 of these questions with detailed solution if you have not connected with me on LinkedIn please do so take a look at my LinkedIn recommendation like this recording share it with other connect with me on Instagram Facebook Twitter and Reddit so the best way to illustrate the concept of customer advances and deposit is to actually look at an example four star beach resort rent beach umbrellas and cheers for a for a returnable deposit so you go there you rent it you have to give them a deposit for the month of June the resort collected ten thousand dollar in customer deposit well if they collect ten thousand dollar we're going to debit cash credit liability return deposit so simply put they're going to give back deposit to the customers deposited for fitted due to damage or not returned items amounted to a thousand what does that mean it means up to a thousand dollar we're either not returned or the or the item was damaged so those are for fitted for fitted means we're not going to give the customer back the money because the asset was either damaged or never returned what do we have to do then well they only returned the liability returned that we gave back the cash for is nine thousand so notice what's going to happen we're going to create this return deposit account which is a liability deposit and we're going to start with ten thousand dollar then once they return the item we reduced it by by nine so notice we still have a thousand what happened to this thousand simply put this thousand will have to be reduced to zero but what we consider now as if they purchase the item so what is going to happen is we're going to debit return deposit and we're going to credit sales it's as if the customer purchased it they never return it they purchase it now the inventory cost of the equipment is 60 percent of the deposit what does that mean it means we purchase those items for 60 percent of the deposit it means we paid for the items that were either never returned or damaged six hundred dollars obviously we charge them more just in case that happens so therefore we're going to debit cost of goods sold six hundred and we're going to credit our inventory six hundred simply put before the damaged item we made a profit of four hundred dollars but we sold them now we don't want to we don't want to sell them why not we want we want those items to be back so we can rent them again and again and again but worst-case situation the customer takes them we make a profit of four hundred dollars so it's not a big deal but we would prefer we're in the business of renting we're not in the business of selling let's take a look at sales taxes payable what are sales taxes payable payment received from customer in addition to the sales as a fee basically as a tax collected on behalf of the government simply put the retailer when you go to buy something from a store for example in pennsylvania they will charge you six percent sales tax well all what the business is doing is holding this money for the government they collect it from you and they're holding it for the government so ad-harm companies make sales worth of ten thousand dollar and collected six percent sales what does that mean it means ad-harm collected in total ten thousand six hundred dollar in cash however sales revenue is only ten thousand and the remainder is sales taxes payable of six hundred dollar which is a current liability now at some point ad-harm will have to submit this money to the government so when ad-harm sends the money to the government whether it's after a month after the quarter depending on your payment schedule with the state we're going to debit sales taxes payable we're going to reduce sales taxes payable and we're going to send the cash out so simply put the sales taxes payable is gone and our cash is reduced by six hundred or what we are left with is debit cash ten thousand credit sales revenue and that's it because we were like in a sense we were not custodians but we were like an agent to the government we received the money then we gave it to them that's all what we did another example of sales taxes payable is some companies they may bunch the sales with the sales tax so they do not separate sales tax from the amount of the sale at the time of the sale it's a little bit irresponsible I know from practice that some companies don't do that and the reason is their accounting system or their point of sale system don't separate they cannot separate the sales from the sales tax but you have to be careful at the end of the period you have to back out the sales the sales tax from the sales so the company what they do they bunch everything in the sales revenue account so they will have a sales revenue and in that sales revenue they will have for example one hundred and eighty thousand sitting in there but in this amount but in this in this amount included is sales taxes that doesn't belong in this amount so let's assume the sales revenue was one hundred and eighty thousand including six percent of sales tax now basically this is a this is an algebra problem what does that mean it means we have some we don't know what the sales amount is but we know the sales amount times one point oh six gave us one hundred and eighty thousand because x is sales and the sales tax is one point oh six now if we solve for x what's going to happen is it's going to be one hundred and eighty thousand divided by one point oh six so this is the formula you will take the the gross amount divided one point oh six one plus the one plus the sales tax now we're going to find out that this is the sales amount that should remain in the sales amount therefore we have to back out ten thousand one hundred eighty eight dollars and sixty eight cent from the sales tax so we debit sales revenue and we credit sales taxes payable so simply put we're going to debit this amount out of sales revenue and the remainder which is one sixty nine eight eleven point thirty two is the actual sales then what we do is we pay the sales tax we debit this amount sales taxes payable ten thousand one eighty eight and we credit cash once we submit the money to the government another current liability is income taxes payable what is income taxes payable unlike employees where your money get withheld every paycheck and we're going to talk about this with holding in the next session when we talk about payroll corporation they must estimate and pay quarterly taxes what does that mean it means every quarter so if this is a year one two three and four for every quarter they have to estimate how much profit they have and they have to pay the taxes usually by the fifteenth of the next quarter so companies make those periodic payment either an authorized depository banks or federal reserve I remember when I was in business in a sense when I was in practice we had many companies that relied on us relied on our CPA firm to make that deposit for them they will send us their quick books will determine what was their profit for that quarter and we'll have access to their checkbook and literally we would write a check on their behalf we had that authorization and I will take how physically I used to take the check to the bank during my lunch break and deposit that check endure what's called authorized depository banks to pay their taxes so simply put assume Adam company estimated their first quarterly profit to be 60 000 and their state tax rate is three percent now they have to make an estimate they have to pay three percent of that 60 000 in profit well if we take 60 000 times three percent that's going to be 1800 we're going to increase an expense credit income taxes payable then when I walk with that check to the bank we're going to debit income taxes payable 1800 in credit cash and this is what I used to do after I come back I would go back and input this entry to to to let the system know we paid the taxes the best way to learn this stuff is to go to my website now farhatlectures.com and work multiple choice questions at the end of this recording I'm going to remind you again thank you for watching of course that whether you are a student or a CPA candidate take a look at my website invest in yourself the fee is nominal you're going to invest once in your lifetime pass your accounting courses get your accounting degree get your CPA and focus on your career that's going to pay you dividend for decades don't shortchange yourself the CPA is worth it study hard good luck and of course stay safe