A contingent liability is a potential liability that may or may not occur depending on the outcome of an uncertain future event. In accounting, contingent liabilities are liabilities that may be incurred by an entity depending on the outcome of an uncertain future event such as the outcome of a pending lawsuit. These liabilities are not recorded in a companys accounts and shown in the balance sheet when both probable and reasonably estimable as contingency or worst case financial outcome. A footnote to the balance sheet may describe the nature and extent of the contingent liabilities. The likelihood of loss is described as probable, reasonably possible, or remote. The ability to estimate a loss is described as known, reasonably estimable, or not reasonably estimable.

Contingent liabilities are also important for potential lenders to a company, who will take these liabilities into account when deciding on their lending terms. Business leaders should also be aware of contingent liabilities because they should be considered when making strategic decisions about a company’s future.

Examples of contingent liabilities include outstanding lawsuits, claims against the company not acknowledged as debts, legal liability, liquidated damages, tort, unliquidated damages, destruction by flood, product warranty, income tax disputed, sales tax disputed, and financial guarantees.

Contingent liabilities can be broken down into three categories based on the likelihood of occurrence: probable, reasonably possible, or remote. A contingent liability is recorded in the accounting records if the contingency is probable and the related amount can be estimated with a reasonable level of accuracy. If both of those conditions cannot be met, the contingent liability could be inserted in the footnote of a financial statement.

In summary, a contingent liability is a potential liability that may or may not occur depending on the outcome of an uncertain future event. These liabilities are not recorded in a companys accounts and shown in the balance sheet when both probable and reasonably estimable as contingency or worst case financial outcome. They are important for potential lenders to a company and should be considered when making strategic decisions about a company’s future. Examples of contingent liabilities include outstanding lawsuits, claims against the company not acknowledged as debts, legal liability, liquidated damages, tort, unliquidated damages, destruction by flood, product warranty, income tax disputed, sales tax disputed, and financial guarantees.