Question

Current liabilities are debts or obligations owed to others outside the business and due within one year. All businesses and organizations incur current liabilities as part of their routine operations. For example, a sporting goods store purchases goods (sports equipment) on account in anticipation of the upcoming season. They also have current liabilities for utility bills, rent, etc. Current liabilities recorded for utilities, rent, etc. are also recorded as an expense. This ensures companies are following the Matching Principle.

Contingent liabilities are generally not known and are contingent on an event happening. Over the last decade, arguments on whether contingent liabilities should be recorded, disclosed, or remote have been raised. A good example is BP. BP had a huge oil spill and many liabilities arose from this event. BP had to disclose this in their Annual Report in 2010 because at the time, it could not estimate an amount. However, in 2011, many of these disclosed contingent liabilities were recorded because past transactions were estimable.

Whether it is a known, estimated, or contingent liability, companies incur these liabilities in the course of their operations. It's inevitable. This is why it's important to understand the different types of current liabilities and how they are classified.

Instructions

Image you own or work for a business. Create a report, to address the following information:

1. Identify and describe the type of business or organization you will be using.
2. Present and describe two examples of current liabilities that your business or organization might have. Please be specific and explain why you chose these two examples.

3. List one example of an estimated liability and one example of a contingent liability that your business or organization has or might have. Explain why it is estimated or contingent.
4. In summary, explain how these liabilities affect the financial statements.

Please answer all of the questions, if you can not answer all of the questions do not reply.

Answer 1

1. Identify and describe the type of business or organization you will be using?

Ans: I will be taking a Corporation which is dealing in Construction & Trading of Immovable Properties Specifically Land & Buildings.

2. Present and describe two examples of current liabilities that your business or organization might have. Please be specific and explain why you chose these two examples?

Ans: Current liabilities are a company's debts or obligations that are due within one year, appearing on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.

Essentially, these are bills that are due to creditors and suppliers within a short period of time. Normally, companies withdraw or cash current assets in order to pay their current liabilities.

Examples are Sundry Creditors for Bricks, Cement, Contractors, etc. & Taxes to be Payable to the government.

Creditors are Common in Every type of Corporation and that also we will get enough cash only when we progressing in the construction contract if we have taken a construction project.

Taxes Payable is also Common because whenever we sale or purchase goods we will be paying taxes as well as Employee deductions.

3. List one example of an estimated liability and one example of a contingent liability that your business or organization has or might have. Explain why it is estimated or contingent?

Ans: A contingent liability is a potential liability (and a potential loss). It is dependent upon a future event occurring or not occurring.

Example May be Bills Discounted in the Bank or any Customer filed a law suit on us for any claim which will depend on the future court decision.

Some liabilities are not contingent liabilities but are estimated liabilities. For Example Repairs & Maintenance for the current Plant & Machinery. In this case we will be estimating that expenditure will be incurred on this machinery, but we don’t know the amount of expenditure.

4. In summary, explain how these liabilities affect the financial statements?

Ans: Closing Current Liabilities will be shown under Balance sheet under current liabilities & for estimated liability we will be providing a provision for the expected amount of expenditure which will be shown in the balance sheet as Provisions & Contingent Liability will be shown at the foot of the balance sheet and it will not affect the financial statements.