Contingent liability Accounting

Contingent liability Accounting

In this article we would discuss the accounting for contingent liability. A possible liability which would be confirmed on occurrence or non occurrence of future event is called contingent liability. A present obligation with unconfirmed amount is also classified as contingent liability.

Recognition of Contingent Liability

Contingent liability is recognized in the books of account in case of certain or probable liability. In case of possible liability only disclosure is made in the financial statements, and when the liability is remote, then there is neither recognized nor is discloser required.

a)    Certain liability is recognized.

b)    Probable liability is recognized.

c)    Possible liability is disclosed.

d)    Remote liability is ignored.

The certain liability is recorded by the following journal entry. The liability is created in the form of provision by crediting the provision and debiting the relevant loss/damages as expense.

Date	Particulars	Dr.	Cr.
	Damages (P&L)	$ xxx
	Provision for Damages		$ xxx

Example of Contingent Liability

XYZ & company expect a fine of 5 million; the two other companies were fine $7 million and $ 10 million for same kind of violation.

Solution

In above example, the amount of fine will be confirmed in future and management cannot make a reliable estimate about the liability. Thus a provision cannot be created; rather the liability would be disclosed.