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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.
- 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.
The major differences between contingent liabilities and liabilities are as follows −
|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.|
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