Accounting Quality

Overview
The value of financial accounting is determined largely by its quality. The central concept of
accounting quality is that some accounting information is better than other accounting
information at communicating what it purports to communicate. Accounting quality is thus of
great interest to participants in the financial reporting supply chain. There is, however, no single,
widely accepted definition of the term “accounting quality”. It is interpreted differently by
different individuals, organizations and industries. But in the final analysis, all definitions of
account quality serve to facilitate value judgments about accounting information. Although both
the FASB and IASB stress the importance of high-quality financial reports, one of the key
problems found in prior literature is how to operationalize and measure this quality

The quality plays a vital role in ascertaining the value of a product. Financial accounting is no
exception to it as the quality of accounting determines its value. The ability to comprehend the
given information is one of the factors contributing to the quality. The true position of the
organization involving the firm’s performance, financial risk associated should be portrayed by
the accounting information. The information should help in forecasting the organizations
earnings and cash flows. The accounting quality can be hampered by influencing the data in
order to position the company in a better place among the public. Accounting quality does not
stop with incorporating the standards listed by GAPP (Generally Accepted Principles and
Practices) or IFRS (International Financial Reporting Standards) whereas; the published
financial statements should reflect the true situation as to where the firm stands. The organization
can maintain a high accounting quality is the data depicted are unbiased and uninfluential.

What Is a Liability?

A liability is something a person or company owes, usually a sum of money.

Liabilities are settled over time through the transfer of economic benefits
including money, goods, or services. Recorded on the right side of the balance
sheet, liabilities include loans, accounts payable, mortgages, deferred revenues,
bonds, warranties, and accrued expenses.

In general, a liability is an obligation between one party and another not yet
completed or paid for. In the world of accounting, a financial liability is also an
obligation but is more defined by previous business transactions, events, sales,
exchange of assets or services, or anything that would provide economic benefit
at a later date. Current liabilities are usually considered short-term (expected to
be concluded in 12 months or less) and non-current liabilities are long-term (12
months or greater).
Liability may also refer to the legal liability of a business or individual. For
example, many businesses take out liability insurance in case a customer or
employee sues them for negligence.

KEY TAKEAWAYS

 A liability, generally speaking, is something that is owed to somebody else.

 A liability can also mean a legal or regulatory risk or obligation.
 In corporate accounting, companies book liabilities in opposition to assets.
 Current liabilities are a company's short-term financial obligations that are
due within one year or within a normal operating cycle such as accounts
payable and taxes owed.
 Long-term (noncurrent) liabilities are obligations listed on the balance
sheet not due for more than a year such as bond interest payments.

The settlement for which is made transactions

In financial accounting, a liability is defined as the future sacrifice of economic benefits that the
entity is obliged to make to other entities as a result of past transactions or other past events,[1] the
settlement of which may result in the transfer or use of assets, provision of services or other yielding
of economic benefits in the future.
A liability is defined by the following characteristics:

 Any type of borrowing from persons or banks for improving a business or personal income that
is payable during short or long time;
 A duty or responsibility to others that entails settlement by future transfer or use of assets,
provision of services, or other transaction yielding an economic benefit, at a specified or
determinable date, on occurrence of a specified event, or on demand;
 A duty or responsibility that obligates the entity to another, leaving it little or no discretion to
avoid settlement; and,
 A transaction or event obligating the entity that has already occurred
Liabilities in financial accounting need not be legally enforceable; but can be based on equitable
obligations or constructive obligations. An equitable obligation is a duty based on ethical or moral
considerations. A constructive obligation is an obligation that is implied by a set of circumstances
in a particular situation, as opposed to a contractually based obligation.
The accounting equation relates assets, liabilities, and owner's equity:
Assets = Liabilities + Owner's Equity
The accounting equation is the mathematical structure of the balance sheet.
Probably the most accepted accounting definition of liability is the one used by the International
Accounting Standards Board (IASB). The following is a quotation from IFRS Framework:
A liability is a present obligation of the enterprise arising from past events, the settlement of
which is expected to result in an outflow from the enterprise of resources embodying economic
benefits
 — F.49(b)

Regulations as to the recognition of liabilities are different all over the world, but are roughly
similar to those of the IASB.

Liabilities of an organization are the obligations that a firm owes to an external

party. The transactions carried out in the past calls in for settlement in the future
which contributes to liability. The settlement is made through transferring
economic benefits.

the extent which the accounting information reflects the company's performance and/or financial position (Barth et
al., 2008;Chen et al., 2010;Hribar et al., 2014); the extent which accounting information makes it possible to estimate
the expected cash flows (Callen et al., 2013); or the accomplishment of the qualitative characteristics of the financial
information (Legenzova, 2016;IASB -International Accounting Standards Board, 2018). In this paper, all these
perspectives are considered, meaning that accounting quality is understood in a broad sense, including but also
going beyond the concept of financial reporting quality, to encompass earnings management, value relevance and
timely loss recognition concepts, among others (Robu et al., 2016). ...

The purpose of a balance sheet is to give interested parties an idea of the company's financial
position, in addition to displaying what the company owns and owes. It is important that all investors
know how to use, analyze and read a balance sheet. A balance sheet may give insight or reason
to invest in a stock

What is a contingent liability?

The future occurrence of events decides upon the whether liability has transpired or not. Contingent
liability is one of the types that might or might not lead to actual liability depending on the future
occurrence of events. For example the company issuing warranty for its products, if the 10% of its
products sold fails then the organization is labile to those 10% of products. The liability cannot be
determined at the time of sale hence this can be classified as contingent liability.

Definition of Contingent Liability

A contingent liability is a potential liability that may or may not become an actual liability.
Whether the contingent liability becomes an actual liability depends on a future event occurring
or not occurring.
In accounting, some contingent liabilities and their related contingent losses are:

 Recorded with a journal entry

 Are limited to a disclosure in the notes to the financial statements
 Not recorded or disclosed
We have another Q&A that discusses the recording of contingent liabilities.
Examples of Contingent Liability
A company's supplier is unable to obtain a bank loan. The company agrees to guarantee that the
supplier's bank loan will be repaid. As a result of the company's guarantee, the bank makes the
loan to the supplier. The company has a contingent liability. If the supplier makes the loan
payments needed to pay off the loan, the company will have no liability. If the supplier fails to
repay the bank, the company will have an actual liability.
If a company is sued by a former employee for $500,000 for age discrimination, the company
has a contingent liability. If the company is found guilty, it will have an actual liability.
However, if the company is not found guilty, the company will not have any liability.

A product warranty is also a contingent liability

Disclosing a Contingent Liability

A loss contingency which is possible but not probable will not be recorded in the accounts as a
liability and a loss. Rather, it will be disclosed in the notes to the financial statements.
A loss contingency that is probable or possible but the amount cannot be estimated means the
amount cannot be recorded in the company's accounts or reported as liability on the balance
sheet. Instead, the contingent liability will be disclosed in the notes to the financial statements.
Not Reporting or Disclosing a Contingent Liability
A loss contingency that is remote will not be recorded and it will not have to be disclosed in the
notes to the financial statements. An example is a nuisance lawsuit where there is no similar case
that was ever successful.
Example of Recording a Contingent Liability
Product warranties are often cited as a contingent liability that meets both of the required
conditions (probable and the amount can be estimated). Product warranties will be recorded at
the time of the products' sales by debiting Warranty Expense and crediting to Warranty Liability
for the estimated amount.

There are two criteria for the recognition of assets, liabilities, income or expenses: probability and reliability.
It must be probable that future economic benefit associated with the item will flow to or from the company. Probability
takes into account the degree of uncertainty that economic benefits may flow to or from the company. Judgments
exercised will take into account the evidence available when the accounts are prepared that relate to conditions that
existed at the end of the reporting period. If it is not probable that economic benefit will flow then the item is not
recognised.

The second requirement is that the cost or value can be measured reliably. In many cases, the cost or value will be
known; however, in some cases, it will be necessary to make a reasonable estimate. If a reasonable estimate cannot
be made, the item cannot be recognised.

If an item is not recognised because it fails either of the criteria it may qualify for recognition at a later date and may
nonetheless warrant disclosure in the notes to the accounts for the current period. This is appropriate if knowledge of
the item is relevant to the users of the accounts.