Accounting principles and practices

Accounting

Contingent liabilities are could be potentially incurred by a firm depending on the outcome of an event within the future. These liabilities are termed contingent based primarily on the fact the outcome may or may not result in loses. The most common form of contingent liabilities occur with court cases. In many instances, the outcome of the case may or may not be in favor of the firm. As such, it is difficult for the firm to accurately depict the outcome of such an event (Keenan, 1980). Contingent liabilities are therefore used to account for the uncertainty regarding a future event that may result in loses to a company. Common forms of contingent liabilities include court cases, as mentioned above, sales tax disputes, income tax disputes, product warranty disputes, damages, and so forth. Contingent liabilities are especially important for companies looking for bank financing. The amount of possible losses is very important in regards to the overall riskiness of the firms operations. These liabilities are recorded on the company's balance sheet using a reasonable estimate of potential gains or losses. Within the balance sheet, contingent liabilities are placed in the accounts payable heading. A footnote detailing the extent of the liability is then placed on record. This footnote details the nature of the liability and management's estimation of the likelihood of loss (Management Accounting, 1997). Common buzz words management uses in regards to loss are, "Probable," "Reasonable," or "Remote." Although these words can vary, management must be careful to provide an accurate account of the likelihood of loss and a reasonable estimate of loss. It is important to note that many contingent liabilities are not currently a liability but may become one in the event of adverse circumstances in the future. An example of an accounting journal entry for a contingent liability is listed below

Accounting Example: