Which of the following best describes a 'contingent liability'?

A contingent liability is best described as a potential obligation that may arise based on the outcome of a future event. This definition highlights the nature of contingent liabilities, which are not certain and depend on the occurrence of a future event, such as the outcome of a lawsuit or warranty claims. Because they are based on uncertain future events, contingent liabilities are generally not recorded on the balance sheet as actual liabilities but are instead disclosed in the notes to the financial statements if certain conditions are met.

The other options do not accurately capture the concept of a contingent liability. An obligation guaranteed by another party refers to a different type of liability, typically concerning guarantees or co-signing of obligations, which do not rely on a future event. A recorded liability is one that is certain and has been recognized on the balance sheet, which is distinct from the nature of contingent liabilities that remain uncertain until a future event occurs. A known liability that is due immediately would refer to obligations that require payment right away, which contrasts with the contingent nature of uncertain future obligations.