 Hello and welcome to the session in which we would look at this CPA exam question Which can be a multiple choice or a simulation that deals with Property tax revenue and simply put we need to to understand how to compute property tax revenue For a governmental entity for a particular year 20x2 For that physical year 20x2 Chester County levied 510 million in property taxes the county collected taxes applicable to that particular year as follow June 1st 20x1 through September 30th 20x1 20 million so here's what you have to know this basically this is Year x1 and this is year x2 now the year ends September 30th So this is the year end September 30th So we are looking from September 30th x1 till September 30th x2 So this is the area that we are looking to Figure out how much revenue was collected Now the first thing we did is we levied the taxes 510 million when we levied the taxes The government has the right to collect the money believe it or not at this point. We have a receivable Yes, you do record property tax revenue as a receivable So the first thing you have to do is you're gonna you're gonna book a receivable for 510 million property tax receivable and you are going to credit not revenue the third inflow of resources not yet But it's gonna become revenue later before we proceed any further I have a public announcement about my company farhat lectures calm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley gleam miles my accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of lectures multiple choice questions through false questions as well as exercises Go ahead start your free trial today. No obligation. No credit card required So, yes, we do have receivable when it comes to property tax revenue Why because even if the owner of this property sells their property the new owner will have to pay the taxes Now for the sake of simplicity, we are not going to assume any allowance for this example But for the 510 million when we levied it when the government says now legally now you have to pay it We have the right to collect it from you. Well, it's a receivable Now June 1st Through September 30th. So in this area here in this period even before the year started Here in this area some taxpayer paid a 20 million. That's great Well, some people do prepay their taxes if that's what you want to do. That's fine. That's fine, but It's not revenue until the year kicks in so when they pay when those individual prepay their taxes because they paid from June till September even before the Physical year kicks in we debit cash. We credit the third flow of resources. It's not revenue yet But when is it gonna be revenue? Well, what when the year kicks in? Well, we are in 20 x2 When what we do is we debit this number the third inflow of resources to remove the deferred inflow and We credit property tax revenue and this is part of the answer So it's gonna be 20 million for sure of revenue will be recorded in 20 x2 So we took care of this 20 million Now from October through September we collected 450 million. So we are looking at this period here We collected 450 million great when we collect money we debit cash We credit a receivable since we set up a receivable We credit the receivable now we can turn the the third inflow of resources into actual revenue So we are going to debit the third inflow of resources for 450 million and credit property tax revenue 450 million again. We are looking for revenue. This is another piece of revenue So so far we have a revenue of 450 plus 20 Are we done yet? No, we took care of this 450 million October 1st x2 through November 30th x2 was 12 million so let's take a look at the time Timeline here and we're looking in this period here in this period we collected 12 million How how are we gonna account for this 12 million? Is it part of revenue or not? Here's where the modified accrual comes into place modified accrual basis. We said we have 450 plus 20 We recognize revenue when it's measurable and available to finance expenditure in the current period. Well, what does that mean? Let's assume Sometime in October sometime in October x2. We had an expenditure Okay, and this expenditure will not be paid. Usually they give you 30 or 60 days until November 15th on 20 x2 So November 15th, so I'm just making this example. You're gonna see why I'm putting the dates November the 15th We're gonna be also receiving cash. So notice the expenditure took place in 20 x2 The cash that we're gonna be receiving in 20 It's gonna be outside the period of 20 x2, but it's gonna be coming to finance 20 x2 expenditure Since the money will be available and what we assume is this we assume that 60 days after year-end money will be coming and that money will be financing expenditure that took place in that particular year And that's that and the government really knows about this Why because if this is where they prepare their financial statement, let's assume they prepare their financial statement September 30th This is where the year and not when they prepared it If this is the year end it may take them a month or two or three month The government take their time in preparing their financial statement So they will know in the next 60 days whether they're going to be receiving money That's going to help finance expenditure that took place in that particular year So what does that mean? So it means 60 days after year-end Any cash that we collected we assume it's going to be financing expenditure in that prior year So although the money was collected notice the money was collected through from October 1st through November 30th year x2, which it means it belongs to x3 physical year. It doesn't matter We're gonna include this in year in year x2 Now what are we going to do at the end of the period if we can estimate this number if we can estimate this number What we're gonna do we're gonna debit the third inflow of resources Of 12 million and we are going to credit property tax revenue of 12 million. Why do we do that? Because we know Most likely that we are going to receive this money And we know we're going to be using this money to finance expenditure. Therefore if it is If it's measurable and available to finance expenditure, it's revenue Therefore we're going to recognize this as revenue when we actually receive the money when we actually receive the money we debit cash We debit cash and we credit the third inflow of resources So basically the third inflow of resources is basically gone and what we have is 12 million of cash 12 million of revenue Now what happened to as I told you The government may not prepare their income tax their financial statements until two three years two three months after not years That's I don't know. Maybe some of them do Two three months after the year end now, none of them can wait years But the point is they can take their time So what happened is we can wait we can wait until that revenue If we don't want to book this entry we can wait until we receive the cash We can debit cash and credit revenue of 12 million or what we can do we can Basically book the revenue and wait for the cash again Depending on when the government wants to do that, but that's another 12 million of revenue that's counted Last but not least December 20 December 20 x2 we collected 2 million that belongs to 20 x2 Well, guess what that money is not available to finance expenditure 60 days after year end So December is 60 days after now and your cpr review course they may say Consider 90 days after so you have to be careful typically it's 60 days But if they give you some other date some other number of days you have to be aware of this But this 3 3 million Does not belong we cannot report it as revenue in year x2 in year x2 So the revenue is 450 million 20 million which is 470 plus 12 Is 482 therefore property tax revenue for x2 that's going to be reported this 482 million What should you do now go to far hat lectures and look at additional resources Exercises multiple choice true false lectures that's going to help you understand governmental accounting Modified a cruel basis. This is an important topic whether you are an accounting student cpa candidate or studying for some sort of an accounting Certification invest in yourself. Good luck study hard and stay safe