Unearned Revenue and Current Maturities of Long Term Debt - YouTube

Okay while we're talking about current liabilities, let's talk about two pretty

straightforward topics: unearned revenues and current maturities long-term debt.

Unearned revenues means we owe somebody some work. So remember any account that

has the word payable, accrued or unearned in it means we owe somebody something.

"Unearned" means that we owe somebody some work. So let's refresh our memories with

a transaction that doesn't involve unearned revenue. Let's say Holy Names

University sells 10,000 tickets for a basketball game. Each ticket is $10 so

that's $100,000. So why don't you pause this video and see if you can come up

with the journal entry for that transaction. I hope you got it. Cash is

increasing so we're going to be debiting cash and we're going to have a revenue

account that's going to increase with a credit. So we're going to debit cash for

$100,000 and credit ticket revenue. Remember ticket revenue is a revenue

account. It increases with credits. It isn't cash. It keeps track of our sales

whether we get paid today tomorrow or never. In this case we got paid today - on

the day of the game we collected the cash. So now let's just change the facts

a little bit. Let's say that we sell out all our home games in advance by selling

season tickets. And we've got five home games - 100,000 dollars each.

So that's $500,000. So what's happening to cash? Cash is going up, so we're going

to be debiting cash. Cash is an asset. Assets increase with debits. But we

haven't earned that revenue. It's August 6th. Our basketball games don't start

until September. So we have "unearned" revenue. So instead of crediting that

revenue account, we credit a liability account called unearned ticket revenue.

And we make a little note to remind ourselves exactly what happened. So we

sold out five home games. All our customers paid us five hundred

thousand dollars cash and we now have a liability on our books that shows that

we owe the world $500,000 worth of basketball entertainment. Then as we

provide that entertainment, as we play those

basketball games, we convert that liability into a revenue account. So

let's say we play our first game. And so that's worth a hundred thousand dollars -

ten thousand seats times $10 a seat. So we reduce the liability by a hundred

thousand dollars and we book ticket revenue of a hundred thousand dollars.

Remember a revenue account keeps track of our sales whether they got paid today,

tomorrow or never. And in this case we got paid "yesterday." We got paid back in

August but we finally provided the service, we finally get to book the

revenue, on our income statement. And so that's all there is to unearned revenue.

The tricky part is to remember when the cash changed hands and the cash changed

hands "before." So when we provide the services we simply reduce the liability

account and finally book the revenue. Now the super straightforward topic of

current maturities of long-term debt. So if we enter into a long-term mortgage our

payment is going to stay the same over the life of that mortgage. And each

payment is going to include some interest and some principal. The principal

portions that are due within the next year are CURRENT liabilities. So for

example, let's pretend like we borrow $800,000 on December 1st 2016 and we're

going to repay it over 30 years at a fixed interest rate of 4%. When we

prepare our balance sheet on December 31st 2016 we've got to show the current

portion and the long-term portion of our debt. And well how do we figure out what

the current portion is? Well we create an amortization schedule. An amortization

schedule is pretty simple really. We know the balance is $800,000. One

month has gone by now so we own one month worth of interest. But our total

payment is $3,819.32. We get that either from a financial calculator or from

using the "= PMT" command in Excel. So this is one month worth of interest this

is 4% divided by 12 - because we only want one month times the balance. We make a

total payment of $3,819.32 - we only owe $2,666.67 in

interest so this must be the part that applies to

principal and that reduces our principal balance. We do the same thing for the

February payment. The payment stays the same but we owe a little bit less

interest now because the balance is a little bit smaller due to that last

principal payment. So total payment minus the interest gives us the principal

portion. And again we reduce the balance we do that for 360 payments, 30 months

times 12 months. 30 years times 12 months is 360 payments. And the thing eventually

zeroes out. But now it's December 31st. It's time to make our balance sheet. How

much is the current portion? The current portion are these principal payments

that are due in the next year. Those total fourteen thousand eighty eight

dollars and twenty nine cents. So on our end of the year balance sheet this will

be the current portion of long-term debt. This $785,911.71

will be the long term long term portion. So those two topics

are pretty straightforward "Unearned" revenue means somebody pays us in

advance. We debit cash, credit unearned revenue. And then as we earn it

we simply reduce that liability and book the revenue account with a credit.

Current maturities long-term debt means to look at our mortgage or whatever our

long-term debt instrument is and figure out what the principal payments that are

due the next year and that's the CURRENT portion. That's all there is to it.