Contingent Liability

What Are Contingent Liabilities

Contingent liability refers to those liabilities that can incur as an entity and depends on the outcomes of the pending lawsuit. Such liabilities are not recorded in the company’s account and are shown in the company’s balance sheet when they are reasonably and probably estimated as a “worst-case” or “contingency” in the outcome. The extent and nature of the contingent liability can be explained by a footnote. The loss is described as remote or probable. And the ability to recognize is reasonably estimated. 

Define Contingent Liabilities

Contingent liabilities are those liabilities that tend to occur in the future depending on an outcome. Such liabilities are recorded when their amount can be estimated. It may or may not be disclosed in a footnote unless it meets both conditions. Some of the common contingent liabilities examples are product warranties, pending investigations, and potential lawsuits. 

Contingent liabilities meaning also signifies the fact that they change according to the amount of money estimated and their likelihood of occurring in the future. The accounting rules make sure that the readers of the financial statement receive enough information. 

Contingent Liability Accounting 

Contingent liabilities are those liabilities that are not included in the financial statement of the company. They fall under the obligations that have not occurred yet but can occur shortly. As it is not a liable component, it is not included in the accounting system of the company. Contingent liabilities are not reviewed annually.

Examples of Contingent Liabilities in Accounting are

  1. Lawsuit

  2. Fluctuations in the foreign exchange process

  3. Changes in government policies

  4. Bank guarantee

  5. Pending cases

Contingent Liabilities Meaning in Tamil

Contingent liability in Tamil means தொடர்ச்சியான பொறுப்பு

What is Contingent Liabilities Example? 

Contingent liabilities example is as follows:

1. Counter guarantees and guarantees that are given by the company.

2. The company gives a certain guarantee to another stakeholder on behalf of their third party. Or it can also be said as the guarantee performed by certain companies as a result of the contract.

3. Product warranty is also given by the company.

4. The company also gives a guarantee on behalf of the stakeholders.

5. The company also issues a letter of credit.

6. The examples also include the adverse judgment of the potential disputes. 

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FAQs (Frequently Asked Questions)

1. What do you mean by contingent liabilities?

A contingent liability is a form of liability that may or may not take place in the future. It also refers to the future expense of a company that can occur due to a triggering event and can convert the company into a loss situation. It is also called a lawsuit. Its concept borders on considerations and vagueness with recognizable events. One can follow two methods while dealing with contingent liability. They are:

  • To assume if an event can likely occur in the future

  • And if the monetary figures can be expressed

If the contingency satisfies the above-presented methods then they can be presented in books. At first, the contingency liability is expressed in form of an expense in the loss and profit account and then it is mentioned in the balance sheet.

2. Name the different types of contingency liabilities?

Contingent liabilities are classified based on their probability. Some of the types of contingent liabilities are:

  • Probable contingency: probable contingency refers to any such loss that has been assumed to occur in the future. It has a 50% chance of happening soon. A probable contingency is recorded in the company’s book because the law of conservatism is followed in accountancy. 

  • Possible contingency: possible contingency refers to the situation that may or may happen. This differentiates it from probable contingency. Hence such contingency is generally not recorded in any book. 

  • Remote contingency: it has fewer chances of occurring in the future and hence is not recorded in any book.

3. Differentiate between provision and contingent liabilities.

The factors that distinguish a provision from contingent liabilities are:

  • The provision refers to the accounting system in the present and its relation with the past event. Whereas contingent liability is those that are recorded in the present to prepare for a future outbreak.

  • The possibility of provision to occur is very certain. Whereas the possibility of contingent liabilities is very much conditional.

  • The estimation of a provision is not certain. While the estimation regarding contingent liability can be made.

  • The decrease or increase of the provision is recorded in the Income statement. Whereas, the latter is not recorded in an Income statement.