Contingent Liabilities (Accounting) - Explained
What are Contingent Liabilities?
Written by J. Mance Gordon
Updated at April 18th, 2024
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What are Contingent Liabilities?
Contingent liabilities are potential obligations. Those obligations from past activities where we are uncertain that they will occur and we are uncertain how much they will cost.
Known liabilities we known will happen and how much they will cost. Estimated liabilities, we known will happen, but we don't know how much they will cost.
There are 3 categories of contingent liability:
- Probable and Estimable - Probably will happen and can reasonably estimate. These go under liabilities on the balance sheet.
- Possible or Probable, but Not Estimable - Reasonably possible or likely that it will occur, but I cannot reasonably estimate it. These are disclosed in the footnotes of the financial statements. Think of potential lawsuits.
- Remote - The likelihood is occurrence is highly unlikely. These are not required to be disclosed in the financial statements - but you can include them if you like.
Related Topics
- What are Current Liabilities? – Financial Accounting
- How to Record Accounts Payable (Liability Accounts)? – Financial Accounting
- What are Notes Payable? – Financial Accounting
- What are Employee Payroll Liabilities? – Financial Accounting
- Estimated Liabilities (Warranties) – Financial Accounting
- What are Contingent Liabilities? – Financial Accounting