Question

what is the treatment of contingent liability in the books of firm​

Answer 1

Explanation:

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Contingent liabilities are never recorded in the financial statements of a company. These obligations have not occurred yet but there is a possibility of them occurring in the future. So a contingent liability has no accounting treatment as such. Now such contingent liabilities have to be reviewed on a yearly basis.

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Answer 2

☆VALID ANSWER☆

Now let’s make one thing clear. Contingent liabilities are never recorded in the financial statements of a company. These obligations have not occurred yet but there is a possibility of them occurring in the future. So a contingent liability has no accounting treatment as such.

However, considering that we follow a conservative approach to accounting, we must follow the practice of the disclosure. So a contingent liability, like contingent assets, will be disclosed in the final statements of a company as a footnote. i.e. notes to accounts. This will happen if

There must be a possible present obligation from a past event

The outflow of economic resources to settle the obligations is not probable (only possible)

Such a possibility of an outflow of resources is not remote

The amount of obligation can be reasonably measured

Now such contingent liabilities have to be reviewed on a yearly basis. And the accountant, management, auditors, etc must make a decision based on the information they have whether it is still a contingent liability or if it is now a provision or even a liability.

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