Contingencies can be divided into two categories: Gain contingencies and loss contingencies.  A gain contingency is a contingency where the possible future outcome is an increase in assets or a decrease in liabilities.  Gain contingencies are are rarely disclosed on financial statements. Gain contingencies are rarely accrued and only disclosed in the footnotes when they are highly probable.  The probability of a loss of contingency should be classified as either remote, reasonably possible, or highly probable.  A loss contingency is a contingency where the possible future outcome which leads to a reduction in assets or an increase in liabilities.  If the probability is remote, the loss need not be disclosed.  If the event is reasonably possible, the potential loss and all relevant information about it should be disclosed in the footnotes.  If the event is viewed as highly probable and the amount of the loss can be estimated, the potential loss and all relevant information about it should be disclosed in the footnotes.  If the event is viewed as highly probable the amount and the amount of the loss can be estimated, the potential loss and associated liabilities should be accrued on the financial statements and described in the footnotes.  When a sale is made that includes a warranty, the sale is recorded.  Because the warranty liability highly probable and can be estimated with reasonable accuracy, warranty expense and contingent warranty liability should be recognized in the amount of the estimated future warranty costs at the same time.  As the warranty costs are paid the contingent liability is reduced.  If you are learning how to become a CPA, one very vast field to practice accounting is in the medical industry.  Health care needs and costs will only increase in the future.

No tags