A contingent liability that is both probable and the amount can be estimated is recorded as 1) an expense or loss on the income statement, and 2) a liability on the balance sheet. As a result, a contingent liability is also referred to as a loss contingency. Warranties are cited as a contingent liability that meets both of the required conditions (probable and the amount can be estimated). Warranties will be recorded at the time of a product’s sale with a debit to Warranty Expense and a credit to Warranty Liability.

A loss contingency which is possible but not probable, or the amount cannot be estimated, will not be recorded in the accounts. Rather, it will be disclosed in the notes to the financial statements.

A loss contingency that is remote will not be recorded and will not have to be disclosed in the notes to the financial statements.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

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