Hello, and welcome everyone. Today in our lesson, we will introduce current liabilities, which are presented as the first category of items on the right hand side of the balance sheet prepared under GAP. Before we get started and talk in details about current liabilities and their classifications and types, let's get agreement on what are current liabilities. What do we mean by current liabilities? Because liabilities in general, all are defined simply in simple words, future sacrifices. Current liabilities represent probable future sacrifices of economic benefits that are expected to be fulfilled within one year from the date of the balance sheet, or within the firm's operating cycle, whichever is longer. Now, since we discussed the definition of current liabilities, let's see what are the transactions that give rise to such current liabilities, and how are they fulfilled. What are the transactions that take place to fulfill those currently liabilities. First of all, we're going to categorize those current liabilities in general, the main ones, into two classifications. Accrued liabilities or accrued expenses, I am going to use those interchangeably, accrued expenses or accrued liabilities, and the other classification are deferred revenues. What do we mean by accrued liabilities? Accrued liabilities represent those transactions that the firm has acquired the good or service, but did not pay the cash yet. It's what we call an account. What about deferred revenues? Deferred revenues represent those transactions where the firm has collected the cash but did not provide the good or service yet, it will be provided in the future. Obviously, in the first case, on the accrued expenses, I actually use a service but did not pay, so there is an obligation. In the deferred revenue, I collected the cash but did not provide the service, so there is an obligation. That's where the meaning of accrued expenses or deferred revenues. Now, let's get more depth into what are the specific transactions that generate each one of them and what will the effect will be fulfilling each one of them. In accrued expenses, let's start with what generates accrued expenses. We actually talked about that, meaning that accrued expenses are generated when the entity consumed the good or service for which cash is not paid yet. As you can see, in the accounting equation, we will see the effect of generating that accrued expense. Basically, liabilities have increased and actually, equities have decreased. Why equity decreased? Because if I consume the service, expense is increased. Expenses, when they increase, they result in decrease of equity. That's why the generation of accrued expenses will increase the liability and will decrease the equity. What about when the accrued expenses are fulfilled? Now, I had an obligation that I fulfilled it, and I fulfilled it by actually paying the cash. Cash is an asset, so if I paid the cash, assets goes down, and that basically I fulfilled my liability so the liabilities goes down. As you can see in the accounting equation, assets going down, liabilities going down. Let's turn the page now to deferred revenues. What generates deferred revenue? This is basically, as we said, when cash is collected for services or goods that will be delivered in the future, resulting, as you can see in their basic accounting equation, now I collected the cash. Cash is an asset. Assets are increasing, but I did not provide the service or delivered the good yet, so I have a commitment and that's why liability is also going up, increasing, as you can see in front of you with the basic accounting equation. What about fulfilling that deferred revenue? What happens next? Actually, when I collected the cash, now it's time for me to fulfill the service, to provide the service. Once I do provide the service as an entity, then I deserve revenue recognition. That's why you're going to see in the equity, equity is going up because I earned the revenue, and the liability is going down because now, I fulfilled my commitment where I have increase in equity and a decrease in liabilities. Those are, in general, the basic transactions that give rise to accrued expenses and the fulfillment of accrued expenses, deferred revenue, and the fulfillment of deferred revenue. In conclusion, what is the takeaway with this lesson? Current liabilities can arise either when the entity consume goods and services for which it did not pay cash yet, or when it collects cash in advance for goods and services that it did not provide yet. In both scenarios, the fulfillment will decrease the liability. In the case of accrued expenses, the fulfillment will be in terms of paying off the cash, while the fulfillment in the case of a deferred revenue will be in terms of providing the good or the service. Thank you very much.
