 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at current liabilities. This topic is covered in a financial accounting introductory course, as well as the CPA exam. As always, I would like to remind you to connect with me on LinkedIn, if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance, and tax lectures. This is a list of all the courses that I cover, including many CPA questions. If you like my recording, please like them, click on the like button, share them, put them in playlist. Especially these days with the coronavirus, many students can use those lectures to help supplement their accounting education. And please connect with me on Instagram. On my website, you will find additional resources if you want to supplement your accounting education and or study for your CPA exam to earn those seven to 10 points to pass your exam. So let's talk about liabilities. What is a liability? So if you want to use one word for liability, the word is that. But really what liability is is a present obligation. That's what it is. It's a present obligation. You have to pay something. You are under an obligation. You have to perform. So company has a present obligation. Now, why would you have a present obligation? Why would you have? Why are you obligated to someone? Well, because something happened in the past. Something happened in the past. For example, you purchased supplies and you did not pay for them. As a result, now you have a present obligation. Present obligation. What would this present obligation requires you to do? Well, it would require you to make future payment. So a liability has three components. It has a present component, which is you are responsible for something now because of something happened in the past that you have to pay in the future. And liabilities can be broken into two classes. We have current liabilities. What are current liabilities? We talked about those when we looked at the classified balance sheet. Those are liabilities that are due within one year. So we have to pay them within one year or the company's operating cycle, whichever is longer. We assume one year is longer than the company's operating cycle. Therefore, we could always say it's their due within one year. So you pay them off within one year. What are long-term liabilities? Guess what? They will do after one year. So they're gonna be with us longer than one year. So it's not gonna be one year liability. It will be more than one year. In this session, in the next few session, we will focus on current liabilities. Then we will have few sessions about long-term liabilities. We have certain liabilities that are known liabilities and we're gonna learn later that we have unknown liabilities. So now we're gonna be working with known liabilities that are known. What do we mean by known liabilities? It means we know when we have to pay them and how much and to who. Three things. How much, to who and when. Those are known. And we are familiar with known liabilities. For example, account spable is a known liability. When you have an account spable, you know how much you're gonna be paying to who you're gonna be paying it and when. The best way to illustrate account spable, which we should be all familiar with this liability is to work an example. Let's assume we purchased inventory for $10,000. We debit inventory and we credit account spable. Now the first thing I want you to know about liabilities is they have a credit balance. For example, accounts spable, if we're looking at accounts spable from a T account perspective, it will have a credit balance. So this is accounts payable and we have $10,000 in that account. Now, once you have a liability, the next thing you should be thinking about when am I going to pay off this liability? What do I mean by this? What I mean by this is when am I going to pay off the accounts spable? When am I going to debit this accounts spable? Well, when do you debit this accounts spable? When you pay off the liability. So when you pay off the liability, you debit the accounts payable and you pay it with cash and your accounts spable is down to zero. So this is how an accounts spable comes to life and this is how we get rid of it. create a payable, then we pay it. Once we pay it, the liability goes down to zero. Other liabilities that we're going to be dealing with in this session, sales taxes payable and unearned revenue. You should be familiar with unearned revenue, but you may not be familiar with sales taxes payable. Other known liabilities are short term notes. We'll have one session for short term notes and payroll liabilities. We'll have a whole session about payroll liabilities. So let's take a look at sales taxes payable. What is sales taxes payable? You should be all familiar with this concept. When you buy something from a store, what's going to happen? Let's assume you purchase something in Pennsylvania for a hundred dollars. What end up happening? You end up paying 106. Why 106? Because the state will charge you a 6% state tax. Therefore, you'll pay an additional 6 dollars. You end up paying 106 dollars. So this is what sales taxes payable is. So you pay a little bit more than what the selling price is because the merchant will have to pay a sales tax on that item. So they will collect the sales tax from you. So on August 31st, let's assume Home Depot sold material for 6,000 dollars subject to a 5% sales tax. Now the sale is for 6,000. So as far as Home Depot is concerned, the sale is 5,000, but Home Depot will collect from you an additional 5% in sales tax. So here's how it works. Home Depot will collect from you 6,000 and 300 dollars. How are we going to break the 6,300 dollar? The 6,000 is the sale itself and 300 is the sales tax. How did we come up with 300? It's 6,000 dollar subject to a 5% sales tax. That's 300. We debit cash 6,300. We credit the sales, which is the amount that we generated from this transaction is 6,000. In the 300 dollar, we create a liability called sales taxes payable, which is 300 dollars. Therefore, we debit cash 6,300. We credit sales and we credit sales taxes payable. Now eventually, the merchandiser, the business, will have to submit the payment, this 300 dollar. They will have to submit this 300 dollar to either the state, the city, the county. It's a sales tax. They'll have to submit it to someone. Let's assume it's a Pennsylvania. They will have to submit this money to to Harrisburg, to the state, to the state capital. So when they cut the check and they submit this money, they will debit sales taxes payable. They will debit this account and they will send the checkout. Then they will send 300 dollars. So if you notice, all in all, what happened is this, all in all, this, the sales taxes payable is gone. Okay, 300 and 300. And this debit, this additional 300 is debited 300. Therefore, what we'll end up with, what Home Depot will end up with is cash sales 6,000 credit sales 6,000. This is what Home Depot will end up with. And this is exactly what happened. They had a sale of 6,000. All what they were doing, they were holding the 300 dollar. They were holding it for the state, so they can submit this money to the state. And let me tell you something about this. Often, not oftentimes, sometime, it's not the, it's, it's, it's sometime what happened, you have merchants, they collect the sales tax, they collect the sales tax and they never submit the sales tax to the, to the, to the state or to the local or to the local government. And what end up happening, the local government or the state or the county will come after them. I'll tell you a story where I used to work one customer, one of our clients, he did not know that the money he was collecting on his sales, he was supposed to keep it separate. So what he did, he never kept it separately and he went ahead and he spent this 300 dollar. Let's assume he collected 300 dollars. He collected much more. And when his bill was due, he was upset and angry that we did not tell him that that money, he was supposed to keep it separate. So sometime business people don't understand that the sales tax, they have to keep it in a separate account. All what they're doing is they're holding this money. And it's very tempting when you have the money in your, in your, in your hand to be careful with it. Okay. The third liability we're going to be working with in this session and non liability is unearned revenue. And how does unearned revenue works unearned revenue works when the business is paid upfront before they perform the service. So they get the money before they before they perform the service. And let's take a look at a straightforward example. On June 30, Selena Gomez sells half a million in tickets for eight concerts. So she sells all these tickets for to play eight concerts. Now Selena has the money in her bank account. Therefore she will debit cash and she will credit unearned ticket revenue. Notice the word unearned. It's not earned yet. So this is a liability. Don't let the word revenue fools you. It's unearned revenue. Okay. It's five million. Now what's going to happen as Selena plays the concert, as she plays the concert, she will start to earn this revenue. So let's assume she plays one concert. On October 30th, she plays the first concert. As a result, she is going to debit this account 625. Why 625? She earned one eighth of the revenue. She played one concert. She earned one eighth of the revenue 625. And now she does credit actual revenue. Now, sometime you're going to be asked, what is the remaining balance in unearned revenue? So you have to kind of compute unearned revenue. Initially, you had five million dollars when you got that money, June 30th. On October 31st, you did earn 625,000. And what's left is 4,375. This is the balance as of October 31st. After she plays that concert, what does that mean? It means she needs to play seven more concerts. And as she plays the concert, this account is debited and the balance is reduced eventually until it's reduced to zero. So this is how unearned revenue works. In the next session, we would look at short-term notes, payable, because I believe it's worth looking at this topic separately. If you like this recording, please click on the like button, share it, put it in playlist. Don't forget to check out my website for additional resources, especially if you're trying to supplement your accounting education and or studying for your CPA exam. Good luck and stay safe to reduce these coronavirus days.