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An employee has filed a suit against a company claiming compensation of ₹ 1,00,000 for dismissing him from his job. According to the estimate of an advocate of the company, sum of ₹ 40,000 is likely to become payable. Will there be any entry in the books of the company for this event? If yes, for which amount? According to which principle? If the matter is pending in the court of law, is there any requirement to disclose the details of claim for compensation in financial statement? If yes, according to which concept?

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Yes, there will be an entry in the books for ₹ 40,000, according to the Prudence concept. According to this concept, recognise expenses or losses as soon as they are reasonably possible. In this case, if the matter is pending in the court of law, then according to Full disclosure concept, ₹ 1,00,000 should be disclosed in the financial statements as contingent liability.

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