What is the journal entry to record a contingent liability?

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• Details of contingent liabilities are also included in this template as such events may vary between provision and contingent liability depending of the uncertainty of the potential outflow.
• Should it report a probable loss from a future disaster as a liability on its balance sheet?
• If the firm manufactures 1,000 bicycle seats in a year and offers a warranty per seat, the firm needs to estimate the number of seats that may be returned under warranty each year.
• Provide two examples of situations where businesses collect monies from customers and employees and report these amounts as a current liability.

Disclose the existence of a contingent liability in the notes accompanying the financial statements if the liability is reasonably possible but not probable, or if the liability is probable, but you cannot estimate the amount. 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. The most common example of a contingent liability is a product warranty. Other examples include guarantees on debts, liquidated damages, outstanding lawsuits, and government probes. Assume that a company is facing a lawsuit from a rival firm for patent infringement. The company’s legal department thinks that the rival firm has a strong case, and the business estimates a $2 million loss if the firm loses the case.

What is Contingent Liability?

GAAP accounting rules require probable contingent liabilities—ones that can be estimated and are likely to occur—to be recorded in financial statements. Contingent liabilities that are likely to occur but cannot be estimated should be included in a financial statement’s footnotes.

Do not record or disclose the contingent liability if the probability of its occurrence is remote. Examples of contingent liabilities are the outcome of a lawsuit, a government investigation, and the threat of expropriation. A warranty can also be considered a contingent liability. Do not record or disclose a contingent liability if the probability of its occurrence is remote.

RESOURCES

The processing of transactions for these items is a year-end process, with entries made directly in Umoja using manual journal vouchers . IAS 37 Provisions, Contingent Liabilities and Contingent Assets outlines the accounting for provisions , together contingent liabilities with contingent assets and contingent liabilities . A loss contingency which is possible but not probable will not be recorded in the accounts as a liability and a loss. Rather, it will be disclosed in the notes to the financial statements.

In some cases, the accounting standards require what’s called a note disclosure in the company’s reports. The contingent liability poses somewhat of a fiscal dilemma. On the one hand, it is by definition not sufficiently definite to support the recording of an obligation. Yet on the other hand, sound financial management may dictate that it somehow be recognized. Indeed, if completely disregarded, a contingent liability could mature into an actual liability and result in an Antideficiency Act violation. Agencies have a legal obligation to take reasonable steps to avoid situations in which contingent liabilities become actual liabilities that result in Antideficiency Act violations. This may include the “administrative reservation” or “commitment” of funds, as well as taking other actions to prevent contingencies from materializing.