Accounting

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Current liability vs. Contingent liabilities

Liabilities are obligation towards other party; they may include short term, current and long-term liabilities. Their main aim is to provide the financial performance services at some future date.

Current liabilities are obligations that will be satisfied within a year. The current liabilities of uncertain amounts are mainly done on day to day business operations and include taxes payable and wages payable. In case the exact amounts are not inclusive estimates are made to determine the Present value. The element of uncertainty will automatically affect the payments in future as current liabilities. Examples are accrued liabilities which are wages payable, interest payable and taxes payable.

A contingent liability is a potential loss that determines which liabilities to present in the balance sheet once some uncertainties have been resolved. It is mainly dependent on whether an event occurs in the future or not. It is assumed if an individual files a law suit against our school, the school will have a contingent liabilities. They include lawsuits, government fines and warranty payouts. Estimated liabilities can also be contingent liabilities in the case of tax payable eg property taxes .This is owed because the goods were delivered and have to be established using estimated amounts.

The main difference between the two is that current liability of uncertain amount is created on a company w as to amount or due date which is indeterminate. This means that liabilities must be recorded when realized in accounts payable or notes payable. Contingent liability is not created on a company because it is dependent on some future events. This liability can only be accountable only if there is a high probability of occurrence. Current liabilities are an amount owed while contingent liability is an amount you could potentially owe.

Reference

Peterson, P. P. (2012). Analysis of financial statements (2 ed., Vol. 144).New York: John Wiley & Sons.

Sinha. (2009) financial statement analysis (pp 100-200) London: PHI Learning Pvt. Ltd