What is Provision for Litigation

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When a company grows, some competitors starts to play a bad game to win this competition because they think love and war, everything is possible. So, create the barrier through law. At that time, same company has to keep his defensive mood for bounce back. So, it is normal to enroll the process of taking legal action. This is called litigation.

Now, what is provision for litigation. Provision means keeping secret reserve or keep specific fund set aside from gross profit for this purpose. Means, you have earned Rs. 100,000 net profit and you kept its 10% as provision for litigation. It will be Rs. 10,000. If actual payment done from this provision Rs. 5000. Now, total provision will decrease with Rs. 5000 and balance will be liability. It is liability of company because it must be payable to advocate or other legal expenses.

So, how to show it in Financial Statement

In Profit and Loss Account

We will show in expenses side for calculating net profit.

In Balance Sheet

We will Show it as liability in balance sheet. If there are lots of provisions, we add it in other provisions and total provision will show in liability side.

Following are common provisions in which provision fol litigation will add

provision for bad debts

provision for guarantee

provision for pension

provision for depreciation

provision for loan commitments

provision for employee benefits

a gratuity

b compensated absences

provision for taxation

provision for other assets

provision for litigation

In Cash Flow Statement

For calculating Cash flow from Operation

We will add it in net profit because, it is also cash inflow which is deducted in profit and loss account from our gross profit. We can compare it also with previous year cash flow statement. Previous year provision is 2.04 million and this year 54.64 million.