8.4

Current Liabilities Overview

  • Current liabilities include different types of obligations that must be settled within a year. In this section, we will explore three main types:
    • Deferred Revenue
    • Sales Tax Payable
    • Current Portion of Long Term Debt

Deferred Revenue

  • Definition: Deferred revenue is a liability account that records cash received in advance of goods or services being provided.
  • Importance: According to revenue recognition principles, revenue cannot be recorded until the corresponding good or service has been delivered.
  • Example:
    • United Airlines Case:
    • Customers purchase tickets in advance, and while cash is collected, revenue is not recognized until the flight occurs.
    • Deferred revenue is recorded as a current liability until the service is rendered.
    • Accounting Entries:
    • When cash is received, debit Cash and credit Deferred Revenue.
    • Upon service provision (e.g., a flight), debit Deferred Revenue and credit Sales Revenue for the actual service rendered.
    • Apple’s iTunes Example:
    • Upon selling a $100 gift card, the entry would be:
      • Debit Cash: $100
      • Credit Deferred Revenue: $100
    • When a customer spends $15 on music, the entry would be:
      • Debit Deferred Revenue: $15
      • Credit Sales Revenue: $15

Sales Tax Payable

  • Definition: Sales taxes are collected from customers during a sale and are liabilities until remitted to the government.
  • Accounting Treatment:
    • Sales tax collected is not part of the company's revenue; it is liability owed to the government.
  • Example:
    • Airport Restaurant Case:
    • A $15 lunch has a 10% sales tax, leading to a total sale of $16.50.
    • The accounting entries would be:
      • Debit Cash: $16.50
      • Credit Sales Revenue: $15
      • Credit Sales Tax Payable: $1.50
    • Post Payment:
    • Upon remitting sales tax to the government, the entries would debit Sales Tax Payable and credit Cash.

Current Portion of Long Term Debt

  • Definition: This is the portion of long-term debt that is due to be repaid within the next year.
  • Reporting:
    • Long-term obligations must be separated into current liabilities (due within a year) and long-term liabilities (beyond a year).
  • Example:
    • If a company has a mortgage maturing in 20 years, only the amount due in the next year is classified as a current liability.
    • For a loan of $100,000 with annual payments of $10,000:
    • 2022: Owe $90,000 (after paying $10,000). Current liability = $10,000; Long-term liability = $80,000.
    • 2023: Owe $80,000 (after paying another $10,000). Current liability = $10,000; Long-term liability = $70,000.
    • 2024: Owe $70,000 (after paying $10,000). Current liability = $10,000; Long-term liability = $60,000.
  • Final Balance: On the 12/31/2024 balance sheet, the long-term liability reported will be $60,000.

Summary

  • Deferred Revenue is recorded when cash is received before goods/services are provided, tagged as a current liability.
  • Sales Tax Payable is a liability from sales tax collected, to be remitted to government.
  • Current Portion of Long Term Debt separates due amounts into current and long-term obligations on the balance sheet.