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Hi everyone,
I am confusing of provision and contingent liability especially when the contingent liability which is virtually certain has been recorded as an asset.
I see that the key difference between provision and contingent liability is that:
– Provision is accounted for at present as a result of a past event whereas
– Contingent liabiliti is recorded at present to account for a possible future outflow of funds.Did I understand anything wrong here?
Appreciate for your help.
Provision: existed liability. You must pay it for sure even if you like it or not, just not knowing when and how much. Say: warranty of sold goods, you have to cover the cost of warranty for sure because you sold them but you cannot know exactly when and how many goods will be defective.
C.L:
– Possible liability: you think you may have to pay but not sure. Say: normally your warranty period is 2 yrs but there is news that the future ‘in-debate’ law may require you to extend the period to 3 yrs. Then, the extra 1 year cost of warranty is C.L. The 1yr extra cost becomes your existed liability or not would depend on the future law which is not confirmed yet.
or
– Existed liability but it is not likely that you have to pay something. Say: warranty of goods but most of the buyers have gone bankrupt.That how I understand, may not be correct, if so, sorry 🙂
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