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. It also has current liabilities for utility bills, rent, etc. Current liabilities recorded for utilities, rent, etc., are also recorded as expenses. 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 have been made on whether contingent liabilities should be recorded, disclosed, or remote. A good example is British Petroleum (BP). BP had a huge oil spill and many liabilities arose from this event. BP had to disclose this event in its 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.
Scenario
Imagine that you own or work for a business. Create a two- to three- (23) page report, not including the reference and cover page, to address the following information:
- Identify and describe the type of business or organization you will be using.
- 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.
- 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.
- In summary, explain how these liabilities affect the financial statements.
Be sure to support your responses with credible sources. Note: Wikipedia is not a credible source. Cite your sources and format your paper with APA style. You are not required to write an abstract.
