Accounting for Current and Contingent Liabilities
ACC 205 Principles of Accounting I
November 7, 2011
In accounting it is essential to prepare financial statements with data founded on accrual based accounting concepts and principles. Faithfully documenting each area of the accounting equations, assets equal liabilities plus equity, is the foundation of all financial statements. In the following paper I will discuss one area of the accounting equation liabilities, specifically current liabilities known, as well as estimated and contingent liabilities. With regards to liabilities, I will show how its accuracy is important to the relationship in the financial health of the company. I will also touch on some general differences between the generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) regarding the rules governing current liabilities and contingencies. I will begin with the accounting of each type of the two basic categories of current liability followed by the three categories of contingent liabilities. Next I will review the U.S. GAAP verse IFRS rules governing them and finally the importance of the financial statements legitimacy derived from these liabilities on the financial statements to determine the company’s risk factor.
To begin with, liabilities are classified or divided into one of two classifications, current or long-term. We will focus on current liabilities which are defined in our text as debts that “must be paid either with cash or with goods and services within one year, or within the entity's operating cycle if the cycle is longer than a year “(Horngren, Harrison, Oliver, 2011, p. 211). The two basic categories of current liabilities are those of known amounts and those of estimated amounts and are listed on the balance sheet in order of which they must be paid. Current liabilities of known amounts are as follows; accounts payable, short-term notes...