Contingent Liability - Accounting Coach

Definition of Contingent Liability

• Contingent Liability: A potential liability that may become an actual liability depending on the occurrence or non-occurrence of a future event.
• Accounting Treatment:
  • Recorded with a journal entry
  • Limited to a disclosure in the notes to the financial statements
  • Not recorded or disclosed based on specific circumstances

Examples of Contingent Liability

1. Guaranteeing a Loan:

   • A company’s supplier cannot obtain a bank loan.
   • The company guarantees the supplier's loan repayment, creating a contingent liability.
   • If the supplier repays, there is no liability for the company.
   • If the supplier defaults, the company assumes actual liability.

2. Lawsuits:

   • A company is sued for $500,000 for age discrimination.
   • If found guilty, the lawsuit turns into actual liability.
   • If not found guilty, no liability occurs.

3. Product Warranty:

   • Considered a contingent liability as it depends on future events of warranty claims.

Related Questions

• Difference between contingent liability and estimated liability
• Recording location of contingent liabilities
• Understanding contingent assets
• Reasons for commitments and contingencies appearing on balance sheets without specific amounts
• Timing for recording product warranty liability
• Explanation of a contra liability account

Related In-Depth Explanations

• Accounting Principles
• Balance Sheet
• Financial Accounting
• Income Statement

Additional Information

• Author: Harold Averkamp, CPA, MBA
• Experience: Over 52 years in accounting as a supervisor, manager, consultant, instructor, and innovator in online accounting education.

Resources for Further Learning

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Useful Links

• What is a journal entry?
• What is a liability?
• Recording of contingent liabilities