Define the term "contingent liabilities."

Contingent liabilities refer to potential obligations that may arise depending on the outcome of a specific future event. This concept is integral to understanding the financial obligations of a business, particularly those that are uncertain and dependent on future circumstances, such as lawsuits, warranties, or guarantees.

For example, if a company is being sued, it may not know whether it will have to pay damages or how much those damages will be. As a result, the company discloses this possible liability in its financial statements, indicating it may have to pay if the lawsuit results in an unfavorable outcome.

This classification helps users of financial statements assess the risks associated with a company's operations. Understanding which liabilities are contingent allows stakeholders to make better-informed decisions regarding the company's financial health and leverage. The emphasis on "potential" emphasizes the uncertainty inherent to these obligations, setting them apart from liabilities that are already settled, guaranteed, or certain and quantifiable.