Contingent Assets and Liabilities

In the accounting field, a business is defined by its assets. The sum of the assets is the accounting entity. The accounting entity is the economic unit, the business, being accounted for. It is not necessarily a legal entity. A proprietorship is not a legal entity. Although a corporation is legally recognized, it may operate more than one business and muddle the description.

Assets are considered part of a business if the economic benefits and risks of ownership accrue to that business. When the existence of an asset is uncertain, it is known as a contigent asset. As a result, they are not recorded formally in accounts but are merely listed and described in the notes of the financial statements.

The equity of an accounting entity is defined by its assets. They are the amounts that will have to be paid in respect of its assets. If a property is being leased is defined as an asset, then all the lease payments are considered liabilities. A liability is established in reference to how an asset is defined.

When the existence of a liability is called into question, it is considered a contingent liability. If it is probable the amount will have to be paid, the liability is considered real. But if there is reasonable doubt involved, it would be classified as contingent. Just as with contingent assets, contingent liabilities are not recorded in actual accounts but are only noted on financial statements.

There are times when money will have to be paid but the specific amount is not determinable. Therefore, the liability is real because it is certain money will be paid out but the amount cannot be reasonably estimated. The least probable amount is then recorded in the accounts while a note is made in the financial statements explaining the situation along with its range of possible liability.