Differentiate between contingent liabilities and liabilities

Banking & Finance Finance Management Growth & 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.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.

Nagasravan Tamma

Updated on: 08-Jul-2021

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