Types of Contingent Liability

Added on - 24 Sep 2019

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CONTINGENT LIABILITIES
Types of LiabilityLiabilities are identified as legal obligations to the business or a debt that needs to be given bythe company in some future times. It is considered as a future sacrifice that the company isrequired to make for some economic events in regards to other entities. It is a present obligationthat a company face due to result of some past events. Liability is of many kinds depending onthe time of occurrence such as current, non-current and contingent.Current liabilities- this is a type of liabilities that is due and needs to be paid within a year.Current liabilities are sometimes known as short term liabilities because the debt needs to berepaid within a fixed period of time. This type of liability can be managed and controlled by theorganization. The management should keep close watch to such liability so that the organizationis at the position to maintain a high level of current assets. Current liabilities are usually easilyrepaid by the organized as they are planned or anticipated. Some of the example of this type ofliabilities are accounts payable, interest payable, bills payable and others.Non-current liabilities- this type of liabilities are of long term in nature that are due for longerperiod of time. They are an important source to the company that support them in variousactivities through long term financing. Non-current liabilities are usually huge debts and usuallya business face a solvency crisis when they take such debts. Some of the example of such ofdebts are bonds payable, long term notes payable, mortgage payable and others.Contingent liabilities- this is most unique type of liability that is unknown to the company andtherefore known as contingent or emergency liability. Some of the examples of this type ofliabilities are lawsuits and product warranties.Contingent Liability
Contingent liability is a term used in accounting and financing to show the liability that is thereon a business. In the practical and ever changing world there are many transactions that takeplace in the business are not always known at the present time. Some of the situation in whichtransaction is not always known are during litigation, insurance claims, pending disputes andothers. Thus, the liabilities that rises due to these reasons is knowns as contingent liability.Contingent liability depends on the situation and it may or may not happen. This shows that thereis an uncertainty attached to this type of liability and it also becomes difficult to record suchliability in the financial accounts of the company. This is because such type of liability does notlies in the hand of anyone. The contingent liability is also defined in a different way dependingon the time it is being analyzed for. One method is to define the liability depending on pastevents and the other depends on future events.The contingent liability has also been explained as an obligation that usually arise due tooccurrence or non-occurrence of certain kinds of events. Most of the events in this respect arefuture event and the company has no control over them to manage the liability to take place.Further, it has also been defined as an obligation that arise in the company from past events oractivities and is usually under the control of the company. This type of obligation occurs in twotypes of conditions:One is when it is not sure that an outflow of funds is necessary to discharge the contingentliabilities.The other is when no it difficult or impossible to make any estimation for the legal obligations.These estimations are difficult and cannot be made.
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