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In accounting, contingent liabilities are liabilities that may be incurred by an entity depending on the outcome of an uncertain future event [1] such as the outcome of a pending lawsuit. These liabilities are not recorded in a company's accounts and shown in the balance sheet when both probable and reasonably estimable as 'contingency' or ...
For a corporation with a published balance sheet there are various ratios used to calculate a measure of liquidity. [1] These include the following: [2] The current ratio is the simplest measure and calculated by dividing the total current assets by the total current liabilities. A value of over 100% is normal in a non-banking corporation.
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The current ratio is an liquidity ratio that measures whether a firm has enough resources to meet its short-term obligations. It is the ratio of a firm's current assets to its current liabilities, Current Assets / Current Liabilities . The current ratio is an indication of a firm's accounting liquidity.
Current liabilities – these liabilities are reasonably expected to be liquidated within a year. They usually include payables such as wages , accounts , taxes , and accounts payable , unearned revenue when adjusting entries , portions of long-term bonds to be paid this year, and short-term obligations ( e.g. from purchase of equipment).
Most governments have contingent liabilities, which are obligations that do not arise unless a particular event occurs in the future. [2]: 76 An example of an explicit contingent liability is a public sector loan guarantee, where the government is required to make payments only if the debtor defaults.
The classification of liabilities also plays a role in determining financial ratios, such as the current ratio—calculated as current assets divided by current liabilities. A higher current ratio indicates that the business has sufficient current assets to cover its obligations over the coming year, suggesting stronger liquidity. [ 1 ]
The current ratio is calculated by dividing total current assets by total current liabilities. [3] It is frequently used as an indicator of a company's accounting liquidity, which is its ability to meet short-term obligations. [4] The difference between current assets and current liability is referred to as trade working capital.