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 −

Examples

The examples of contingent liability are as follows −

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