Definition of Contingent Liability
A contingent liability is a potential liability that may or may not become an actual liability. Whether the contingent liability becomes an actual liability depends on a future event occurring or not occurring.
In accounting, some contingent liabilities and their related contingent losses are:
- Recorded with a journal entry
- Are limited to a disclosure in the notes to the financial statements
- Not recorded or disclosed
We have another Q&A that discusses the recording of contingent liabilities.
Examples of Contingent Liability
A company's supplier is unable to obtain a bank loan. The company agrees to guarantee that the supplier's bank loan will be repaid. As a result of the company's guarantee, the bank makes the loan to the supplier. The company has a contingent liability. If the supplier makes the loan payments needed to pay off the loan, the company will have no liability. If the supplier fails to repay the bank, the company will have an actual liability.
If a company is sued by a former employee for $500,000 for age discrimination, the company has a contingent liability. If the company is found guilty, it will have an actual liability. However, if the company is not found guilty, the company will not have any liability.
A product warranty is also a contingent liability.