Question

What do you understand by contingent liabilities?

Hint:

Contingent liabilities are disclosed if probable and estimable, otherwise noted as a possibility.

Answer 1

Step 1: Contingent liabilities are not actual liabilities but potential ones that depend on uncertain future events, such as lawsuits, guarantees, or pending legal disputes. Step 2: They are recorded in the financial statements if the likelihood of occurrence is probable and the amount can be reasonably estimated, typically as a footnote. Step 3: Examples include warranties, pending lawsuits, or loan guarantees.