PPT: Contingent Assets and Contingent Liabilities | Accounting for CA Foundation PDF Download

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Contingent Assets and Contingent 
Liabilities
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Contingent Assets and Contingent 
Liabilities
Contingent Asset
A potential asset emerging from past events, confirmed 
only upon occurrence or non-occurrence of uncertain 
future events not entirely within enterprise control.
According to prudence principle, enterprises should not 
recognize contingent assets as they may lead to 
acknowledging income that might never be realized.
Not disclosed in financial statements but typically in Board 
of Directors report if economic benefits inflow is probable.
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Contingent Assets and Contingent 
Liabilities
Contingent Asset
A potential asset emerging from past events, confirmed 
only upon occurrence or non-occurrence of uncertain 
future events not entirely within enterprise control.
According to prudence principle, enterprises should not 
recognize contingent assets as they may lead to 
acknowledging income that might never be realized.
Not disclosed in financial statements but typically in Board 
of Directors report if economic benefits inflow is probable.
Contingent Liabilities
Meaning of Contingent Liabilities:
A potential obligation that may arise in the future due to past events, 
depending on uncertain future events.
Can refer to a present obligation not recognized because outflow of 
resources is not probable or reliable estimate cannot be made.
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Contingent Assets and Contingent 
Liabilities
Contingent Asset
A potential asset emerging from past events, confirmed 
only upon occurrence or non-occurrence of uncertain 
future events not entirely within enterprise control.
According to prudence principle, enterprises should not 
recognize contingent assets as they may lead to 
acknowledging income that might never be realized.
Not disclosed in financial statements but typically in Board 
of Directors report if economic benefits inflow is probable.
Contingent Liabilities
Meaning of Contingent Liabilities:
A potential obligation that may arise in the future due to past events, 
depending on uncertain future events.
Can refer to a present obligation not recognized because outflow of 
resources is not probable or reliable estimate cannot be made.
Examples of Contingent Liabilities
Example 1: Sale of a Machine
Mr. X sells machine to Mr. Y and is 
responsible for damages. Mr. Y claims ¹20 
lakhs for worker accident. This is a 
contingent liability as it's a possible 
obligation to be confirmed in future.
Example 2: Sale of Cars
Mr. AB sells cars. One catches fire during 
test drive. Customer files lawsuit for ¹50 
lakhs. Despite acknowledging obligation, 
payment depends on court proceedings.
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Contingent Assets and Contingent 
Liabilities
Contingent Asset
A potential asset emerging from past events, confirmed 
only upon occurrence or non-occurrence of uncertain 
future events not entirely within enterprise control.
According to prudence principle, enterprises should not 
recognize contingent assets as they may lead to 
acknowledging income that might never be realized.
Not disclosed in financial statements but typically in Board 
of Directors report if economic benefits inflow is probable.
Contingent Liabilities
Meaning of Contingent Liabilities:
A potential obligation that may arise in the future due to past events, 
depending on uncertain future events.
Can refer to a present obligation not recognized because outflow of 
resources is not probable or reliable estimate cannot be made.
Examples of Contingent Liabilities
Example 1: Sale of a Machine
Mr. X sells machine to Mr. Y and is 
responsible for damages. Mr. Y claims ¹20 
lakhs for worker accident. This is a 
contingent liability as it's a possible 
obligation to be confirmed in future.
Example 2: Sale of Cars
Mr. AB sells cars. One catches fire during 
test drive. Customer files lawsuit for ¹50 
lakhs. Despite acknowledging obligation, 
payment depends on court proceedings.
Recognition and Disclosure
Contingent liability should not be recognized in 
balance sheet
Must be disclosed in notes to accounts unless 
possibility of outflow is remote
Continuously assessed to determine if outflow has 
become probable
When outflow becomes likely, provision is 
recognized in financial statements