Differentiate between contingent liabilities and liabilities

Banking & FinanceFinance ManagementGrowth & Empowerment

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.NoLiabilitiesContingent 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.
raja
Updated on 08-Jul-2021 07:29:58

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