What are contingent liabilities?

Contingent liabilities refer to potential obligations that may arise from future events, which is why the selected answer is accurate. These liabilities are not guaranteed or confirmed expenses, but they depend on the outcome of specific future circumstances. For instance, if a company is involved in a lawsuit, it might face financial obligations depending on whether the court rules in its favor or against it. Until a decision is reached, the liability remains contingent and is not formally recorded on the balance sheet, though it may be disclosed in the notes to financial statements.

Other choices do not accurately describe contingent liabilities. Guaranteed obligations based on current contracts pertain to firm commitments that are already established and do not hinge on future events. Confirmed expenses that impact current financial statements represent known and recorded costs, rather than potential future obligations. Lastly, unrecorded earnings are related to potential income and taxation issues, which diverges from the definition of contingent liabilities that deal specifically with potential obligations rather than earnings.