When it comes to talking about liability with an accounting firm, the word has a widely different meaning than that of which most are used to. Whereas most are familiar with liability in the sense of someone being liable if something goes wrong, such as the health and safety officer being liable if a workplace accident occurs, accountants have a different meaning. For those in the financial sectors, liability means an obligation to be reported on a balance sheet, such as payment for services rendered.
Liabilities are used most commonly in asset calculation by accountants, where the total asset value (in GBP) is the liabilities + the stockholders equity. With this number it is possible to see the total estimated value of a company, and is often used in future financial predictions. Within this classification there are three distinct types of liability; contingent, certain and estimated liabilities.
Certain liability is, as the name would suggest, liability in which a true value can be used. For instance if a company has electricity supplied by the landlord for a set fee, that set fee would not change from month to month and would be a fixed, certain liability. These types of obligations are the simplest for any financial services worker to account for, but there are relatively few certain obligations every month. Some other examples of this would be the monthly expenditure on staff, insurance, and rental fees.
Estimated liability is considerably more common for many accountants, with most obligations falling under this category. Estimated liability is the predicted amount that is owed, weather month to month or day to day, and requires calculations to estimate properly. Using the same example as earlier, a business which rents property but has to pay for its own electricity will judge the amount used, and estimate the monthly value as a liability. Due to the nature of these numbers as estimates, the final value may differ slightly and have to be accounted for, but these figures can give an estimate of the total profitability per month of a business.
The final liability is slightly more complicated, and is much harder to predict accurately without a full data set. Contingent liability is an obligation which depends upon an outcome occurring or not occurring. So any potential cost or gain which has a variable outcome, such as a high yield/risk investment. An easy way of thinking of contingent liabilities would be someone filing a lawsuit against an accountant; the accountant will have to research and evaluate the potential loss, and count it as a contingent liability. In this scenario, the liability is not an estimated one (though being an estimate) because it’s not certain which party will win the suit. This could be shown as a potential loss of £X if the suit is lost, or potential gain of £X if the suit is won and countersuit occurs.