Which statement best describes contingent liabilities compared to actual liabilities?

• A. Contingent liabilities are present obligations with recognized amounts.
• B. Actual liabilities depend on uncertain events and are recognized if probable and estimable.
• C. Contingent liabilities depend on uncertain events and are recognized if probable and estimable; actual liabilities are present obligations with recognized amounts.
• D. Actual liabilities are recognized only when cash is paid.

Answer: (C)

The key idea is that contingent liabilities depend on uncertain future events, while actual liabilities are present obligations from past transactions. Contingent liabilities aren’t recorded as liabilities until the contingency is probable and the amount can be estimated; otherwise they are disclosed. Actual liabilities are recognized in the accounts at amounts expected to be settled, not only when cash is paid. So the best description is that contingent liabilities depend on uncertain events and are recognized if probable and estimable, while actual liabilities are present obligations with recognized amounts.