What are contingent liabilities?

Contingent liability is the liability which depends on future uncertain events of a company. In other words, this liability becomes potential liability depending on the future occurrence of events.

Reasons for contingent liability which are recorded based on accounting principles are as follows −

  •  Full disclosure principle − Reduction in company’s asset and net profitability which has negative impact on company’s financial performance.
  •  Materiality principle − It may influence decision making of different people, who use the company’s financial statements.
  • Prudence principle − If the probability of occurrence of estimated contingent event is more than 50%, then the expenses are recorded.

The accounting treatment for contingent liability is as follows −


The examples of contingent liability are as follows −

  • Warranty (products)
  • Letter of credit issued
  • Guarantees
  • Adverse judgment (if any)