Contingent Liability is the liability which may arise depending on the future event/s.
Let’s take a very common example of any court case of a company/individual. If the court case is not in favor, the company or individual will be liable for the sum amount ordered by the court.
This kind of liability is called contingent liability. To cope up such kind of liability one need to create provision.
Another example of contingent Liability is warranties. When a company gives a warranty against any product, at that point it keeps itself liable in case if there will be any fault comes out in its product
Looking at the above example we can categorize contingent Liability into two parts – i.e.
1) Probable contingent Liability
2) Not probable contingent Liability.
This ‘probability’ point impact the accounting treatment of Contingent Liability.
If the liability is probable and can be estimated, it will be recorded to Expense/loss side in P&L and Liability side in the Balance sheet.
But if the contingent Liability is not probable or the amount cannot be figure out then it will not be recorded any where instead it will be provided in the notes in financial statements.