a. Contingent liabilities
Contingent liabilities are those which may become real liabilities on the happening of some specific event. Thus, if a business guaranteed the repayment of a loan made, say, to a customer for his own purposes, there would be a contingent liability to pay the loan which would become an actual liability if the customer defaulted. The endorsement or drawing of a bill of exchange normally gives rise to a contingent liability which will become a real liability if the drawer, acceptor or prior endorsers default.
Contingent liabilities should be noted on the Balance Sheet but need not be entered in the accounts until they become real liabilities. It is, however, desirable that some provision or reserve should be made out of profits to meet contingent liabilities where they are considerable.
b. Capital commitments
It is also desirable (and in fact obligatory under the Companies Act) that the Balance Sheet should contain a note of the value of commitments which have been entered into for the purchase of fixed assets or other commitments on capital account. Whilst such commitments do not affect current results they will clearly have an effect on future costs and available cash.
