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Current liabilities: known amounts, estimated, contingent

How should the following types of current liabilities be accounted for? Include in your discussion examples of each type of current liability.

Current liabilities of known amount
Current liabilities that must be estimated
Contingent liabilities

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Current Liabilities

Current liabilities are those that are expected to be "extinguished" or satisfied within the next operating cycle or a year, whichever is shorter. For nearly all businesses, this is a one-year period. Why didn't I say "paid in cash?" The reason is that current liabilities can be discharged or satisfied by more than just payments. They can be "extinguished" by:

"1. Delivery of cash
2. Delivery of other financial assets
3. Delivery of goods or services
4. Reacquisition by the debtor of its outstanding debt securities whether the securities are cancelled or held as so-called treasury bonds." (FASB ASC 405-20-40-1)

So, while payment of cash is the most common, a firm can also satisfy an obligation by delivering services (providing goods or services to customers that have paid in advance for instance), by trading for notes, stocks or bonds (financial assets other than cash) or by trading for another obligation.

There are three main types of current liabilities (See Table 1) that need to be satisfied, although every firm may not have a liability in each of these categories at each financial statement date. This paper will review how the current liabilities in each of these three categories, (1) those of known amount, (2) those of unknown amount, and (3) those that are possibly owed, are recorded. The discussion will include both how the liability is recorded and when it is permitted to be removed from the financial records of the firm.

TABLE 1: Types of Current Liabilities: (see attached for better formatting)
Amount known Amount Estimated
Event completed Type 1 Type 2
Event probable but not certain Impossible Type 3

(1) Current liabilities of known amount

Current liabilities of a known amount are those that represent a "sum certain" due at a known date in the future. In other words, the organization knows exactly what amount is owed and exactly when it is due to be paid or satisfied. This is the most common type of current liability and most active businesses would have several of these on their year-end balance sheet.

The most common account of this type is trade accounts payable. These are amounts owed to vendors and suppliers because the firm bought something on credit and has not paid for it yet. The obligation is recorded when the services or goods and the amount is known because the price for the goods and services are known and agreed to at the time of purchase. Vendors and suppliers cannot change their minds after the transaction about the amount owed. It is known and fixed, presuming it is paid on time and does not incur a late fee.

The next most common payable accounts are those related to payroll. These include salaries payable, sales commission payable, payroll taxes payable, ...

Solution Summary

This tutorial is 1,936 words plus five references and provides a table showing how the three types are related and different and gives four to five examples in each category.