Contingent Liabilities and Commitments:
(i) Contingent Liabilities: Contingent liabilities are those liabilities which may or may not arise because they are dependent on a happening in future. For example, a claim is filed against the company in a consumer court by a customer. The court may hold the company at fault and may impose penalty. It may happen otherwise, also whether the company has a liability or not is dependent on court order. Thus, it is contingent liability.
Contingent liability is not recorded in the books of account but it is disclosed in the notes to accounts for the information of the users.
It is to be classified into:
(a) Claims against the company not acknowledged as debt.
(b) Guarantees given by the company.
(c) Other money for which the company is contingently liable.
(ii) Commitments: Commitment is defined as an agreement to perform a particular activity at a certain time in the future under certain circumstances.
Commitments shall be classified as:
(a) Estimated amount of contracts remaining to be executed on capital account and not provided for.
(b) Uncalled liability on shares and other investment partly paid. If the company hold partly paid shares of other companies as investment. The uncalled amount on these shares is a commitment as it will have to be paid when called.
(c) Other commitments (specify nature) such as; arrears of dividends on cumulative preference shares.
