A contingent liability should be entered into the accounting records if it is both probable and reasonably estimable.

Question

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A contingent liability is a potential liability that may arise depending on the outcome of a future event. In order to be recognized in the accounting records, it must meet two criteria: (1) it is likely to occur ("probable") and (2) the amount of the liability can be estimated with reasonable accuracy ("reasonably estimable"). If both of these conditions are met, then the contingent liability should be entered into the accounting records. If not, it may need to be disclosed in the financial statements as a footnote or other disclosure, but it is not recorded as an actual liability on the balance sheet.

A Contingent Liability Should Be Entered into the Accounting Records