Question

Describe what is termed as “contingent liabilities” and discuss their accounting treatment.

(5 marks)

Answer 1

Contigent Liabilities

a)A possible obligation that arises from past events and whose existance will be confirmed only by the occurance or non occurance of one or more uncertain future events not wholly within the contorol of the entity.

b)A present obligation that arises from past events but is not recognised because:

i)Its not probable that an outflow resourses embodying economic benifit will be required to settle the obligation; or

ii)The amount of obligation cannot be ensured with sufficient reliability

Contigent Liability is a liability that may or may not happen. This means their is a uncertainity about recording such transaction in financial account. This is because the happening and non happening of contigent liability is not in our hands.

The contingent liability or a potential loss that may occure in the future depending upon the outcome of a specific event Like the examples of potrntial lawsuit or warantees of the object that we brought. If the amount can estimated by company., the amount set aside by company to solve that particular liability when it arise.

Basically Accounting treatment of contingent liability is as folliws:

-when contigent liability is probable and estimatable its recorded as liability

-when it probable with non estimatable and possible its diclosed in notes

-when contigent liability is remote no disclosure