Definition of Contingent liability:
Hypothetical liability which depends on a possible (but hardly likely) event or situation to occur before becoming an actual liability. Contingent liabilities are different for every type of business and profession, and management makes provision for them by setting aside appropriate funds as reserves. Examples include acts of employees, credit guaranties, incomplete contracts, pending court cases, third party indemnities, unfilled purchase orders, unsettled disputes, etc. Under corporate-legislation, contingent liabilities must be disclosed in a balance sheet via an explanatory note (footnote).
A contingent liability is a liability that may occur depending on the outcome of an uncertain future event. A contingent liability is recorded if the contingency is likely and the amount of the liability can be reasonably estimated. The liability may be disclosed in a footnote on the financial statements unless both conditions are not met.
Pending lawsuits and product warranties are common contingent liability examples because their outcomes are uncertain. The accounting rules for reporting a contingent liability differ depending on the estimated dollar amount of the liability and the likelihood of the event occurring. The accounting rules ensure that financial statement readers receive sufficient information.
A potential financial liability; (Accounting) a future financial liability which may only arise in specific circumstances or is difficult to quantify, but must be accounted for.
How to use Contingent liability in a sentence?
- You need to make sure that you know all of the contingent liability to any new project that you are about to take on.
- Drivers for the company are taught to operate inside very strict and rigid guidelines, in order to keep the possibility, however remote, of contingent liability down, as the company cannot afford expensive litigation.
- If the liability is likely to occur and the amount can be reasonably estimated, the liability should be recorded in the accounting records of a firm.
- The contingent liability was a ramification or implication on the bifurcating tree of possibilities that needed to prepared for today.
- A contingent liability is a potential liability that may occur in the future, such as pending lawsuits or honoring product warranties.
- Contingent liabilities are recorded to ensure that the financial statements are accurate and meet GAAP or IFRS requirements.
Meaning of Contingent liability & Contingent liability Definition