What is an Estimated Liability?

An estimated liability is an obligation for which there is no definitive amount. Instead, the accountant must make an estimate based on the available data. This results in an accrued expense that appears within the current liabilities section of the balance sheet.

Examples of Estimated Liabilities

There are many types of estimated liabilities that you might experience. Here are several examples:

Warranty reserve. This estimated liability is based on an estimate of the number of warranty claims that will be received.
Defined benefit pension liability. This estimated liability is based on multiple estimates of how long employees will live, how long employees will continue to work for the company, and the return on investment of funds set aside for pension payments.
Bonuses. A business might have bonus plans for a number of its employees. If so, it may not be possible to accurately derive the probability of bonus payouts until well into the year, so the accountant must derive an estimated liability in the meantime.
Environmental liabilities. This is the costs related to environmental cleanup, compliance, or fines due to regulations or contamination.
Legal liabilities. This is the estimated settlement amounts or fines related to pending litigation or claims.
Self-insurance liabilities. This is the costs estimated for covering future claims under self-insured policies.