A future uncertain liability which is dependent on the happening of some event is known as contingent liability. It may or may not arise incidence of such a liability is conditional. It will crystallise into an actual liability in the event of a certain contingency arising which is outside the control of the proprietors of the business. Contingency may be with regard to the arising or not arising of the liability.
Contingent liabilities may be of two types:
1) Liability which involves loss;
2) A liability which involves the acquisition of an asset of an equivalent amount, if such asset is not likely to be equal in value to the contingent liability there will be a contingent loss.
Following are some of the instances of contingent liabilities:
1) Liability on bills discounted outstanding or bills accepted on behalf of others;
2) Liability under a guarantee given in favour of others;
3) Liability for disputed claims and cases pending decision of the count;
4) Calls on partly paid shares held as investments;
5) Liability for arrears of dividends on cumulative preference shares;
6) Contracts entered into for future delivery of goods when the price of the goods has increased;
7) A guarantee given by a company in respect of a loan or over-draft ranted to a managed company;
.jpg)