An obligation (liability) that an entity may, or may not, incur depending on the outcome of an uncertain future event such as a pending lawsuit, product warranties, liquidated damages, etc. In other words, it is an obligation or a financial loss that may arise in the future depending on whether an uncertain event occurs. It may also refer to a present obligation that is not probable to be paid or whose amount cannot be currently measured reliably.

A contingent liability is recorded in the accounting books of an entity if its occurrence looms and the related amount can be estimated (but not exactly measured) with a reliable degree of accuracy. Otherwise, such liabilities are not reported on the balance sheet. The trigger (or turning point) may occur at any time in the future, but the potential obligation or loss remains highly uncertain.

Once timing and the measurability of such a liability becomes foreseen, an entity should create provisions to account for such a possibility. When the amount or timing of the contingent liability becomes certain, then it ceases to be treated as a contingent item and hence it should appear on the balance sheet.