Course Outline
Join PRO

What is the difference between a contingent liability and an estimated liability?

Author:
Harold Averkamp, CPA, MBA

Definition of a Contingent Liability

A contingent liability is a potential liability (and a potential loss or potential expense). For a contingent liability to become an actual liability a future event must occur.

Examples of Contingent Liabilities

Assume someone files a lawsuit against Jay Corp. Jay Corp now has a contingent liability. The lawsuit will become an actual liability only if Jay Corp is unsuccessful in defending itself. (Many lawsuits are nuisance suits that will not be victorious in court.)

Another contingent liability is the warranty that automakers provide on new cars. Since it is probable (not merely possible) that some vehicles will require work during the warranty period and the automakers can estimate that amount, the estimated amount of the warranty cost will be reported as a liability on the automakers’ balance sheets at the time that the cars are sold. The other part of the journal entry is to debit Warranty Expense and report it on the income statement.

Definition of an Estimated Liability

An estimated liability is a liability that is absolutely owed because the services or goods have been received. However, the vendors’ invoices have not yet been received and the exact amount is not yet known. The company is required to estimate the amount since the estimated amount is far better than implying that no liability is owed and that no expense was incurred. Many of the accrual adjusting entries require estimated amounts.

Examples of Estimated Liabilities

Liabilities that are not contingent liabilities but are estimated liabilities include the following:

  • The electricity and natural gas consumed but the bill has not been received
  • An emergency repair that occurred but the bill has not been received
  • Real estate taxes that have occurred but the tax bill has not been received
  • Worker compensation insurance premiums which have occurred but the bill has not been received

These liabilities must be recorded by using estimated amounts.

Join PRO to Track Progress
Must-Watch Video

Learn How to Advance Your Accounting and Bookkeeping Career

  • Perform better at your current job
  • Refresh your skills to re-enter the workforce
  • Pass your accounting class
  • Understand your small business finances
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

Features

PRO

PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Certificates of
Achievement

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus