Contingent liability

 

CONTINGENT LIABILITY

Definition of contingent liability:-

It is an anticipatory liability which may or may not occurred depending on the outcome of an uncertain future event. Generally, It will not appear in any of the financial statements, but shown as foot note. The examples of contingent liability are mentioned below:-

(a) Liability of a case pending in the court,

(b) Liability for un-paid calls,

(c) Arrears of fixed cumulative dividends,

(d) Liability on bills discounted,

(e) Law suits,

(f) Product warranties,

(g) Environmental problems,

(h) Premium offers, etc.

 

Note:-

A contingent liability is recorded if the contingency is likely and the liability amount.

 

Contingent liability should not provide for the following cases:-

(a) bank guarantees,

(b) Letter of credit

(c) Octroi liability,

(d) Income tax liability.

 

Accounting treatment of contingent liability:-

There is three ways to classify the contingencies as mentioned below:-

 

Nature of payment	Reasonably estimate	Not reasonably estimate
Probable (high chance)	Liability portion has to record, and Disclosure required for not recorded portion of amount	Disclosure required
Possible (slight chance)	Disclosure required	Disclosure required
Remote (not determinable)	Disclosure not required	Disclosure not required

 

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SCR Gallery

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