A contingency is a potential financial obligation that may occur depending on the outcome of a future event. It is recognized in accounting only if the event is probable and the amount can be reasonably estimated.
5 Must Know Facts For Your Next Test
Contingent liabilities must be disclosed in the notes to the financial statements if they are not probable but still possible.
If a contingent liability is probable and the amount can be reasonably estimated, it should be recorded as an expense and liability.
Examples of contingencies include lawsuits, product warranties, and environmental cleanup obligations.
The Financial Accounting Standards Board (FASB) provides guidelines on how to account for contingent liabilities under GAAP.
Contingencies are evaluated at each balance sheet date to determine if any adjustments or reclassifications are necessary.
Review Questions
What criteria must be met for a contingent liability to be recorded in the financial statements?
How should a company disclose a contingent liability that is possible but not probable?
Can you list three common examples of contingencies?
Related terms
currentLiabilities: Obligations due within one year or within the company's operating cycle.
probable: An accounting term that means more likely than not to occur.
disclosure: Providing information in the notes to financial statements when items do not meet recognition criteria.