Differentiate between contingent liabilities and liabilities

Liability is the amount owed to a creditor. Long term and short term liabilities are the types of liabilities.

Long term liabilities are expected to pay over the years or the time frame is more than a year. However, short term liabilities are expected to pay within a year.

A contingent liability is the liability which may or may not occur. That means the contingent liability will depend on future events.

Accounting

  • Liability is accounted for immediately as you owe the obligation. Amount is recorded in books as accounts or notes payable.
  • Contingent account is accounted for only when the obligation is probable and amount is estimated.

Requirements and standards

  • Liabilities are recorded when actually realized.
  • Contingent liabilities are recorded, when the loss is significant.

Differences

The major differences between contingent liabilities and liabilities are as follows −

Sr.No Liabilities Contingent liabilities
1
 Accrued to the entity and it is payable on the date of balance sheet.
 Liability may be payable in future depending on the outcome of specific future events.
2
 Accrues due to past transactions.
 Accrues due to future specific events.
3
 Outstanding as on the balance sheet.
 No outstanding as on the balance sheet.
4
 Immediate monetary impact.
 Not immediate (may or may not be in future) monetary impact.
5
 Accounted for journal entries on transaction rate.
 Not accounted for journal entries till they converted into real liability.
6
 Recorded in the balance sheet.
 Recorded only for the purpose of disclosure.
7
 Quantification is done based on actual values.
 Quantification is based on estimated values.
8
 Monetary flow is certain.
 Monetary outflow is uncertain.
9
 Examples − Deposits, creditors, outstanding payments etc.
 Examples − Warranty, legal suits etc.
Updated on: 2021-07-08T07:29:58+05:30

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