What is estimated liability: Choose the correct answer.
1. Is an unknown liability of a certain amount.
2. Is a known obligation of an uncertain amount that can be reasonably estimated.
3. Is a liability that may occur if a future event occurs.
4. Is not recorded until the amount is known for certain.
Answer: 2. Is a known obligation of an uncertain amount that can be reasonably estimated.
An estimated liability is a real liability that has not been quantified, whereby a company knows that it will require more money to meet certain obligations in the future but the precise amount is unknown. However, the paramount thing is that this amount can be estimated fairly objectively by pre-specified factors, previous history, or statistics. Some examples are warranties, legal suits and cases, or penalties for environmental remedial action. Even though it may not always be possible to know the amount to the last figure, the company can identify and place these liabilities on its balance sheet to give users the clearest picture of the company’s position. This follows the accounting principles of/Absolute and accrual where expenses are reported in the period they are related to the revenues. The other three options are either different categories of liabilities or methods of accounting and therefore do not refer to estimated liabilities.
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