Explanation :
Most liabilities that companies present on their balance sheets are considered known liabilities. You might think this sounds funny. Doesn’t a company know about all of their liabilities? Well, yes. Obviously, a company knows about its liabilities if it lists them on their balance sheet, but that doesn’t make the liability considered a known liability.
Example :
Most unknown liabilities are missing one of those three certainties. Take a note or bond payable to the holder. This means whoever has possession of the note or bond at the due date is entitled to payment. The company originally issues the note or bond to a single person, but that person can freely transfer the debt to someone else. This creates uncertainty as to whom the company has to pay the debt. The company won’t actually know who owns the debt until the due date. That’s why this debt is considered an unknown liability.
In a nutshell :
- Known liabilities are debts that a company has little uncertainty about.
- The company knows who to pay, how much to pay them, and when the payment is due.
- Most of the time, known liabilities come from contracts, agreements, or laws.
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