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3 Tutorials that teach Current Liabilities
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Current Liabilities

Current Liabilities

Author: Evan McLaughlin
Description:

In this tutorial, the student will learn about current liabilities. 

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Tutorial

"Current Liabilities"

Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792

Video Transcription

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Hey, everyone. And welcome to our video, today, on current liabilities. So what is today's video all about? Well, today, we're going to talk about current liabilities. We're going to talk about the different types of current liabilities. We're going to look at accounts payable, sales tax payable, unearned revenue, and contingent and uncertain liabilities. But first, let's start with a brief discussion of current liabilities.

So current liabilities; what are they? They show the company's obligation to pay debts to others, within one year or the operating cycle, whichever is shorter. So our current liabilities really represent our short-term debt obligations. And, like I mentioned earlier, there are several types of current liabilities. The ones that we're going to talk about, today, are accounts payable, sales tax payable, unearned revenue, and then contingent and uncertain liabilities.

But let's focus on those first two, initially. Let's talk about accounts payable and sales tax payable. So accounts payable. These are amounts owed to external vendors for items that were purchased on account. So our accounts payable-- amounts owed to external vendors for items purchased on account. And now we can also have some specific financial-statement accounts that are set up, for some of our other payables. So we'll have wages payable, rent payable, as well as short-term notes payable.

But let's talk about sales tax payable. So how is it collected? Well, sales tax payable is collected from customers at the time of sale. Now, who collects? It would be-- all businesses have to collect that sales tax, at the time of sale, if the state has a sales tax. So, if the state that your company conducts business within has a sales tax, you have to collect that at the time of sale. It represents a percentage of sales owed to the state.

So how does it get paid? Well, the company collects the sales tax from the customers, at the time of sale, so the business collects it from the customers and then remits payment to the government, whether that's monthly, quarterly, annually. And we have to set up a liability for sales tax payable, because of the timing of the payment. So we don't make that payment immediately, so we have money that we owe, based on those sales. So that's accounts payable and sales tax payable.

Now, let's talk about unearned revenue. What is unearned revenue? A liability account that records cash received before revenue is earned. So the important thing, there, is cash received before we earn the revenue. So payments are made to the company, for services or merchandise, and it's before our revenue is earned. So the delivery of the goods, or performance of the services, is to be completed in the future.

So it's not a revenue account. So we don't record sales, because we haven't earned that revenue. So we were receiving this money from our customers, for the delivery of goods or performance of services in the future.

Is it a revenue account? Well, we already talked about that. So it's not a revenue account. It's a liability account. So our unearned revenue is a liability account, because of the nature that the company is required to perform future services or provide future goods. So there's an obligation, there. The company has an obligation to perform. And unearned revenue's contained within our current-liabilities section of our balance sheet. So that's unearned revenue.

Now, let's talk about contingent and uncertain liabilities. Contingent and uncertain liabilities; what are they? It's a potential liability that has the possibility to become an actual liability, dependent on some future event. So potential liability has the possibility to become an actual liability, depending on some future event. Examples would be lawsuits, as well as guarantees or warranty costs. Those would be examples of contingent liabilities.

So when it comes to recording contingent liabilities, there are three categories that we need to consider-- probable, possible, and remote. And those speak to the likelihood of that future event taking place. So a contingent liability will be recorded and disclosed-- so the liability will be recorded and disclosed-- if the likelihood of the event is probable-- so it's probable that the event is going to take place-- and the amount is estimable-- so we can estimate what the liability is going to be.

A contingent liability will not be recorded but will be disclosed, so we will disclose it, in our notes to the financial statements, if the likelihood of that future event taking place is possible and the amount is estimable. And the third is, a contingent liability will not be recorded or disclosed. So we won't record it-- the liability-- and we won't disclose it, in our financial statements, if the possibility of that future event is remote.

So these are the three categories that our contingent liability can fall under. If the contingent liability will be recorded and disclosed, if the event is probable, and we can estimate the amount, the liability won't be recorded but will be disclosed, if it's possible the event will take place, and we can estimate the amount, and then we won't record it or disclose it, if there's only a remote possibility of that event taking place.

So let's summarize what we talked about, today. In a nutshell, we talked all about current liabilities. We looked at accounts payable, we discussed sales tax payable, we looked at unearned revenue, and then we finished up, today, with a discussion of contingent and uncertain liabilities. I hope everybody enjoyed the video, and I hope to see you next time.

Notes on "Current Liabilities"

Terms to Know

Unearned revenue

A liability account that records cash received before revenue is earned.

Contingent liability

A potential liability that has the possibility to become an actual liability dependent on some future event.