Contingent liability

If a firm has received goods from a supplier, along with an invoice that remains unpaid when the balance sheet is drawn up at, say, 31 December, the amount outstanding is recorded as a straight-forward liability in the balance sheet – the debt is a known amount that must be paid. Trickier is what to do about legal action started by, say, an unhappy client. Although there may still be a liability for the firm to settle, it is contingent on the outcome of the case, as is the amount of any payment. But investors still need to know about it. So firms usually leave any related liability out of the balance sheet, but describe the problem in a written contingent liabilities note towards the back of the financial statements.

Merryn

Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.