The financial accounting term contingency is defined as an event with an uncertain outcome that can have a material effect on the balance sheet of a company. Gain and loss contingencies are noted on the company's balance sheet and income statement when they are both probable and reasonably estimated.
Contingencies are one of several types of information that is supplementary to the items appearing on a company's balance sheet. Generally, this information is of two types:
Generally Accepted Accounting Principles, and specifically the Conservatism Constraint, applies when contingencies arise. This principle states that when in doubt, report information that does not overstate income or assets or does not understate expenses or liabilities, therefore:
The value of the loss should be classified as not reasonably estimable, reasonably estimable, or known.
Furthermore, accounting principles require the categorizations of a loss occurrence as:
The soil surrounding a manufacturing plant owned by Company A was found to contain fuel oil, which was leaked from an underground tank removed back in 1992. Initial estimates provided by an engineering firm indicate cleanup costs of $200,000. Since this loss is both probable and reasonably estimable, Company A would record the following loss contingency:
|Site Remediation Expense||$200,000|
|Site Remediation Liability||$200,000|