In business accounting, record keeping and financial statements are one of the fundamentals. Basically, by definition liabilities are financial obligations of a company – the finances that a company owes to other stakeholders. Liabilities are recognized when they meet the following four criterions according to the FASB (Chase). One, when the transaction for that liability has already occurred, two, when the equivalent resource value for the liability is offered on measurable precisions, three, when the entity has little discretion to avoid and that the entity has a future sacrifice for the resource.
Liabilities are divided into three, current liabilities, contingent liabilities and estimated liabilities. Current liabilities are that obligation that uses current assets and also creates other current liabilities. Estimated liabilities are those liabilities that are known to exist but whose amount cannot be precisely estimated. These amounts are estimated on the basis of future expectations of the liabilities. Examples of estimated liabilities include taxes and health care cost liabilities. Estimated liabilities should be updated frequently to ensure proper matching of taxes and revenue. Contingent liabilities, on the other hand, are those liabilities that arise depending on the outcome of some other events. According to SFAS 5, contingent liabilities can only be included in financial statements if they meet the following two criteria (Toporowski). One, when the amount of the loss can be estimated reasonably. Two, when the information available before issuance indicates that liabilities have been incurred. Other important information concerning liability includes valuation of the liabilities and classification of current liabilities.
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"Liability or Contingency".
While dealing with current liabilities and contingencies, facets such as accounts payable and notes payable can’t go unmentioned. Accounts payable are those obligations that arise in the normal procedures of the business. They include trade account payables, recording accounts payable and other unmentioned payable accounts. There are some other terms that are also attached to contingencies in business accounting. These terms are probable, reasonably probable and remote contingencies. Probable contingencies are those future events that are likely to occur. Possible contingencies are those that show any chance of occurring remotely but likely to occur. Remote contingencies are those whose chances for future are very slight.
From the preliminary information, a contingent liability is a liability that is grounded on potential. The potentials, in this case, are the possibilities of future occurrences. Contingent liabilities are important in financial accounting when they are appropriately accounted for. In the case presented, Mertens’ has the obligation paying the Texas government if the taxes were correctly recorded. The taxes are Mertens’ liabilities and contingencies. The intervening of the government to encourage people and organizations to pay taxes was just but a relief to Mertens and its allies. For the first case question, the first alternative is the best and the rightful one. On the issue of considering what amount should one in terms of taxes in a recognized financial statement, it is better is Mertens takes the first alternative on the responses. The alternative of not recognizing any sales taxes payable. Instead, the best option is disclosing the amounts as reasonable possible liabilities.
On the question of whether recognizing and deciding to pay the $60 million, Mertens should consider the second alternative. The alternative suggests that the outstanding liability should not be adjusted but remains because the objective is yet to be settled by the state. This alternative is the best as there is no longer need to accept that something true legal or important. Since there were no legal records, and even so Mertens did not have stores in Texas to keep such records. In a nutshell, it is very vital to understand to understand liabilities and contingencies in business and financial accounting of any business organization in order to make informed financial decisions.
