Brief Description:- No one knows what will happen in next moment? It is not a philosophy but very true. In general life, we make the estimate for all the genuine expenditure to be done. But we make a provision for certain wanted or unwanted expenditures also. For example we keep the reserves for medicines, social obligations and some other legal matters which may happen any time. Similarly in business also there may be so many unexpected expenditures for that a businessman must keep a provision or must be ready to bear that. These liabilities are called contingent liabilities.
Examples:- If some court case is pending and it may or may not go in favor of the company but one has to make a provision for unfavorable decision. Any legal matters related to taxation matters lying for decisions in various tax authorities, any liabilities in respect of the miss-happening of any events relating to products, workers and the assets of the company are few examples of contingent liabilities. There may be some major policies which can be announced by the government because of which the business may suffer some losses in future etc.
So, we can define the contingent liability as a liability which is not occurred but can become a liability on the happening of event which is uncertain.
Accounting Treatment:- No journal entries are made for contingent liabilities because no definite amount is determined at the time of entry and we can not make any entry on the basis of just expectations only. That is why the contingent liabilities are not shown in trial balance. These are only shown as foot notes of trial balance and balance sheet.
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