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Contingencies in Financial Statements

What is a contingency? Why are contingencies important to users of financial statements? What are the criteria for recording contingencies? Should companies record a liability for threatened litigation? Why or why not?

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Contingency means the liability happening of which is not sure. Any liability which is uncertain at the date of preparation of balance sheet is contingent liability, i.e.; amount of liability is not sure at the balance sheet date. Example: pending litigation against the company in the court. Contingent liability should not be mentioned along with other liabilities in the balance sheet. On the other hand, contingent liability should be shown as a foot rate in the balance sheet as the company should provide full disclosure of all particulars which affect financial performance of the company.

Definition of contingency:

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Solution Summary

The solution defines a contingency and outlines their importance, including giving 3 criteria that a liability must meet to be recorded as a contingency. 394 words.