What are contingent liabilities? Give examples of different types of such liabilities show how they should appear in a company’s Balance Sheet
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;
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