The term or caption commitment and contingencies appears near the end of a balance sheet without an amount in order to direct a reader's attention to the disclosures included in the notes to the financial statements.

An amount is not shown for a variety of reasons. For example, a chain of retail stores may have signed five-year, noncancelable leases to rent retail space for $1 million per year. This commitment needs to be disclosed to the readers of the balance sheet. However, if none of the $5 million is actually due as of the balance sheet date, there is no liability amount to be recorded in a liability account.

Another example of a commitment is an electric utility which has signed a noncancelable contract to purchase 100 million tons of coal during the following 10 years. This commitment also needs to be disclosed to the readers of the balance sheet. However, if none of the coal has been delivered as of the balance sheet date, the utility company will not report a liability since nothing is due as of the balance sheet date.

There are also some loss contingencies which are not recorded with amounts in the general ledger, but must be disclosed in the notes to the financial statements. You can learn more about these contingencies by using the search box on AccountingCoach.com.

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