Contingent Liability- Explanation

Contingent liability is defined as a potential liability that may or may not occur in the future. It depends on the occurrence or non-occurrence of a specific event. Guarantees given in respect of third parties are considered as a contingent liability as they are dependent on the third party's ability to repay the debt or fulfill the obligation.

Guarantee- Meaning

A guarantee is an assurance or promise given by one party to another party to fulfill the obligation of a third party in case of default. Guarantees are given to assure the lender or creditor that the debt will be repaid in case the debtor is unable to repay the debt.

Contingent Asset- Explanation

A contingent asset is defined as a potential asset that may or may not occur in the future. It depends on the occurrence or non-occurrence of a specific event. For example, if a company has filed a lawsuit against a competitor for patent infringement, and the outcome of the case is expected to be in favor of the company, then the damages awarded by the court will be considered as a contingent asset.

Provision- Meaning

A provision is a liability that is expected to occur in the future, and the amount of the liability can be estimated with reasonable certainty. Provisions are created to provide for future expenses or losses that are likely to occur.

Conclusion

In conclusion, guarantees given in respect of third parties are considered as a contingent liability as they are dependent on the third party's ability to repay the debt or fulfill the obligation. It is important for companies to disclose contingent liabilities in their financial statements to provide transparency to investors and creditors.

If the principle debtor (ie the person in respect of whom the guarantee is provided) fails to meet the agreement the guarantor will be liable or responsible for the same to creditor(ie the person to whom guarantee is provided) thus it's answer is contingent liability.