Accounting Contingent Liabilities Are Could Essay

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Common buzz words management uses in regards to loss are, "Probable," "Reasonable," or "Remote." Although these words can vary, management must be careful to provide an accurate account of the likelihood of loss and a reasonable estimate of loss. It is important to note that many contingent liabilities are not currently a liability but may become one in the event of adverse circumstances in the future. An example of an accounting journal entry for a contingent liability is listed below

Accounting Example:

A manufacturer of XYZ shoes provides products to various consumers worldwide. XYZ Company provides itself on excellent customer service.

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As such, it provides a one year warranty on its shoes. Using the company's proprietary information, they estimated that each shoe sod is equivalent to roughly $2 of warranty expenses. During the current year, XYZ Company sold 20,000 pairs of shoes. As it is probable that XYZ company will incurred warranty expenses from faulty product and the amount of warranty expense can be reasonably estimated, a contingent liability related to warranty expenses should be recorded. Below is the example.

Accounting Title

Debit

Credit

Warranty Expense

$40,000

Warranty Accrual Reserve

$40,000 ( $2 at 20,000).....

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