A contingent liability is a potential liability it depends on a future event occur

ring or not occurring.

For example, if a parent guarantees a daughter s first car loan, the parent has a
contingent liability.
If the daughter makes her car payments and pays off the loan, the parent will ha
ve no liability.
If the daughter fails to make the payments, the parent will have a liability.
If a company is sued by a former employee for $500,000 for age discrimination,
the company has a contingent liability. If the company is found guilty, it will
have a liability.
However, if the company is not found guilty, the company will not have an actual
liability.
In accounting, a contingent liability and the related contingent loss are record
ed with a journal entry
only if the contingency is both probable and the amount can be estimated.
If a contingent liability is only possible (not probable), or if the amount cann
ot be estimated,
a journal entry is not required. However, a disclosure is required.
When a contingent liability is remote (such as a nuisance suit), then neither a
journal nor a disclosure
is required.
A product warranty is often cited as a contingent liability that is both probabl
e and can be estimated.
Additional examples and a further explanation are presented in FASB s Statement of
Financial Accounting
Standards No. 5, Accounting for Contingencies. This accounting pronouncement is
available at
Read more: http://blog.accountingcoach.com/contingent-liability-contingency/#ixz
z0LqwTotgM

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What is a contingent liability?

A contingent liability is a potential liability. This means that the contingent
liability might become
an actual liability and a loss, or it might not. It depends on something in the
future.
If your parent guarantees your loan, your parent will have a contingent liabilit
y. Your parent will have
an actual liability and a loss only if you do not make the payments on the loan.
On the other hand,
if you make the loan payments, your parent will not have a liability and loss.
A $100,000 lawsuit filed against your company is a contingent liability (or loss
contingency).
Your company will have a liability and a loss only if your company is found guil
ty.
If your company proves that it is not guilty, the contingent liability will not
become an actual liability and loss.

Another example of a contingent liability is a product warranty.

If a company promised to replace a defective unit at no cost to the customer wit
hin one year of purchase,
the company will have an actual liability only if units are defective. If the co
mpany is certain that
no units will be returned as defective, the company will have no liability and n
o warranty expense.
Accountants will record a journal entry to report a liability on the balance she
et and a loss or expense
on the income statement only if the loss contingency is both probable and the am
ount can be estimated.
If a contingent liability is possible (but not probable), no journal entry is ne
eded. However,
the accountant must disclose the contingent liability and loss in the notes to t
he financial statements.
If a contingent liability is remote, then the accountant will not report the lia
bility and loss
and will not disclose it.
You can learn more about contingent liabilities by reading the Financial Account
ing Standards Board s Statement of Financial Accounting Standard No. 5, Accounting
for Contingencies at www.FASB.org/st.
Read more: http://blog.accountingcoach.com/contingent-liability/#ixzz0LqwYuTOs

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Where is a contingent liability recorded?

A contingent liability that is both probable and the amount can be estimated is
recorded as
1) an expense or loss on the income statement, and
2) a liability on the balance sheet.
As a result, a contingent liability is also referred to as a loss contingency.
Warranties are cited as a contingent liability that meets both of the required c
onditions
(probable and the amount can be estimated). Warranties will be recorded at the t
ime of a product s sale
with a debit to Warranty Expense and a credit to Warranty Liability.
A loss contingency which is possible but not probable, or the amount cannot be e
stimated,
will not be recorded in the accounts. Rather, it will be disclosed in the notes
to the financial statements.
A loss contingency that is remote will not be recorded and will not have to be d
isclosed in the notes
to the financial statements.
Read more: http://blog.accountingcoach.com/recording-contingent-liability/#ixzz0
LqwkLvPF

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What is a contingent asset?
A contingent asset is a potential asset associated with a contingent gain. Unlik
e contingent
liabilities and contingent losses, contingent assets and contingent gains are no
t recorded in accounts,
even when they are probable and the amount can be estimated.
An example of a contingent gain and contingent asset might be a lawsuit filed by
Company A against Company B
for infringement of Company A s patent. If it is probable that Company A will win
the lawsuit and
receive an estimated amount of money, it has a contingent asset and a contingent
gain.
However, it will not report the asset and gain until the lawsuit is settled.
(At most Company A will prepare a very carefully worded disclosure stating that
it possibly could win the case.)
On the other hand, Company B will need to make an entry in its accounts if the l
oss contingency
is probable and the amount can be estimated. If one of those are missing, Compan
y B will have to disclose
the loss contingency in the notes to its financial statements.
To learn more about contingencies, see Statement of Financial Accounting Standar
ds No. 5,
Accounting for Contingencies, at www.FASB.org/st.
Read more: http://blog.accountingcoach.com/contingent-asset-contingent-gain/#ixz
z0LqwqGcPQ

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