In the accounting records of a defendant, lawsuits:
A) Are estimated liabilities.
B) Should always be disclosed.
C) Should always be recorded.
D) Should be recorded if payment for damages is probable and the amount can be reasonably estimated.
E) Should never be recorded.

Question

Quizplus · Accepted Answer

Lawsuits should be recorded only if payment for damages is probable and the amount can be reasonably estimated. This is in accordance with the accrual basis of accounting, which requires recording liabilities when they are both probable and estimable. Estimating liabilities is not as accurate as recording actual amounts, but it is necessary in order to reflect the best possible estimate of the company's financial status. If payment for damages is uncertain or the amount cannot be reasonably estimated, a disclosure in the footnotes to the financial statements may be appropriate. However, lawsuits should never be ignored or left undisclosed if they could have a material impact on the company's financial position.

In the Accounting Records of a Defendant, Lawsuits