Contingent liabilities are those liabilities that may or may not be incurred by a company depending on the outcome of a future event. In simple words a contingent liability is a liability which “may or may not arise. For example suppose a patent case is filed against a company which is pending and if it goes against the company then company will have to pay $40000 otherwise nothing, in this case $40000 will be a contingent liability because it is dependent on whether company wins the case or lose it. Other examples of contingent liabilities are guarantees given for another person or company, product warranty, claims not acknowledged as debts etc….
Contingent liabilities are indicated by way of foot note in the balance sheet as they are prima facie not crystallized liabilities affecting the overall liability position of the company. Often people don’t pay attention towards it which is a big mistake because sometimes these types of contingent liabilities can even make companies bankrupt. Hence contingent liabilities should be closely scrutinized by various interested parties like creditors, shareholders, government etc…. before taking any decision about the company.