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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.
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. 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.
Before you begin, please complete your reading assignment and view the presentations for the week.
Discussion Topic
Imagine that you own or work for a business as you discuss the following information in your initial post:
In your original post, answer the following:
Identify and describe the type of business or organization you will be discussing.
Discuss two examples of current liabilities that your business or organization might have. Please be specific.
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.
How will these liabilities affect the financial statements?
You could also take this opportunity to explore current liabilities that other large companies utilize and compare them to yours.
In your responses to your classmates, address the following:
Discuss the current, estimated, and contingent liabilities that your peers discussed in their posts. Do you agree with these liabilities?
Are there any other liabilities that you can think of that this particular business or organization might have?
Is there anything you can add or take away from their responses?