Question

Theories and conceptual reviews on loss contigencies,commitments and estimated liabilities in accounting

Answer 1

Loss contingencies are those contingencies whose happenings are probable. Example, Company X is fighting a case with Company Y for claiming $100 mn as compensation for breach of contract. Chances of winning case by X is huge. Therefore, adjustment is needed in the books of X for the loss due to case. It gives an early warning to investors that company might have to pay huge amiamo which will impact future earnings.

Commitments are the exposures in the form of guarantee given by the company to the outsider's with respect to future liabilities that might happen because of breach of contract. They are not shown in balance sheet unless they are paid by the company. However, there is sdparsep reporting as per SEC which needs disclosure irrespective of payment status.

Estimated liabilities are those liabilities where goods and services are received but invoice is pending. Therefore, in that case , business need to show the amount in the financial statements on the basis of estimate. This is called estimated liabilities.

Example:- Gas consumed but bill not received .

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