Advanced Accounting · AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Prior Period Items and Changes in Accounting Estimates (AS 5)

Updated 5 October 2026 · Fact-checked

Under AS 5, prior period items are income or expenses arising in the current period from errors or omissions in preparing earlier period financial statements. You include them in determining the current period's net profit or loss and show them separately, so their impact can be perceived. A change in estimate affects current and future periods only.

Understand Prior Period Items and Changes in Accounting Estimates

Accounts are prepared on estimates. You estimate useful life, bad debts and provisions. Sometimes you find later that an earlier figure was wrong because of an error or omission. AS 5 deals with how to show such items.

Prior period items are income or expenses that arise in the current period as a result of errors or omissions in preparing the financial statements of one or more earlier periods. The key words are error and omission. Examples are a purchase invoice missed last year, or a wrong depreciation calculation caused by a mistake of fact.

AS 5 requires prior period items to be included in determining the net profit or loss of the current period. You do not rework the earlier year's accounts for them. They must also be separately disclosed in the statement of profit and loss, either as a separate line item or in the notes, in a way that their impact on the current period's profit or loss can be perceived. You disclose the nature and amount of the item so that its effect on current profit can be judged.

A change in accounting estimate is different. Estimates are revised when circumstances change, new information arrives or experience grows. For example, you revise the useful life of a machine from 10 to 8 years. This is not an error. The effect is included in the profit or loss of the period of change, or of the period of change and future periods if it affects both. It is not a prior period item.

The effect of a change in estimate is included in the same income or expense category that was used earlier for the estimate. If the effect is material, you disclose its nature and amount. If the amount cannot be quantified, you disclose that fact. Also remember: if it is difficult to distinguish a change in accounting policy from a change in an accounting estimate, the change is treated as a change in an accounting estimate.

Key rules to remember

Prior period items (definition): Prior period item = income or expense of current period arising from error or omission in earlier period(s); Not an ordinary revision of a figure. The source must be an error or omission.
Treatment of prior period items: Recognise in current period profit or loss and disclose separately (separate line or note), with nature and amount, so the impact on current profit or loss can be perceived; The item is dealt with through the current period, not by reworking earlier years' accounts.
Treatment of change in estimate: Effect recognised prospectively: current period, or current and future periods; No rework of past accounts. Same income or expense head as the earlier estimate.
Revised depreciation after change in useful life: Revised annual depreciation = (Carrying amount at start of year − residual value) ÷ remaining useful life; Applies from the year of change onwards on the straight-line basis. Use this formula when the revision is made at the start of the year. If the revision is made during the year, depreciate the carrying amount at the date of change over the remaining life, pro rata for the period.
Disclosure of change in estimate: Disclose nature and amount of material effect; if not quantifiable, say so; Applies when the effect on the current period or future periods is material.

How to solve Prior Period Items and Changes in Accounting Estimates questions

Use the same sequence for any question on prior period items or changes in estimate. First classify, then compute, then disclose.

1Read the facts and find why the figure changed. Ask: was it a mistake or omission in an earlier year, or new information or changed circumstances?
2If it is an error or omission of an earlier period, classify it as a prior period item. If it is revision due to new information, classify it as a change in estimate.
3For a prior period item, pass the entry in the current year. Compute the amount and its effect on current profit.
4For a change in estimate, compute the new figure from the current year using the remaining life or revised amount. Do not touch earlier years.
5If the question asks for profit, adjust it. Prior period items are disclosed separately, as a separate line or in the notes. A change in estimate stays in the usual expense head.
6Write the disclosure: the nature and amount of the item, and its effect, as the question requires.
7State your conclusion in one line, citing AS 5.

Quickest way: Error or new information: a 20-second test

When to use it: Use it for MCQs and for the first line of a written answer when the question asks you to identify or distinguish.

Look for the words: omitted, wrongly computed, error, oversight. These point to a prior period item.
Look for the words: revised, reassessed, change in useful life, new information, experience. These point to a change in estimate.
For MCQs, be careful with options that rework earlier years' accounts. AS 5 deals with both items through the current period and, for a change in estimate, future periods.
In a written answer, write the classification in the first line with the reason, then the entry or figure, then disclosure. Step marks come from the classification, the working and the disclosure.

Common mistakes in Prior Period Items and Changes in Accounting Estimates

Treating every earlier-year item as a prior period item.
The word 'prior' suggests anything related to the past.
Fix: Check the cause. Only errors or omissions make it a prior period item. Settlement of an estimated liability at a different amount is ordinarily a change in estimate, unless the original estimate was itself an error.
Reworking the opening balances or earlier year profit.
Students mix AS 5 with the idea of correcting comparatives.
Fix: Pass the entry in the current year and disclose the item separately. Do not rework the earlier year's profit for it.
Applying a revised useful life to the earlier years too.
Students want depreciation to look as if the new life had always applied.
Fix: Apply the revised depreciation only from the year of change, on the book value at the start of that year over the remaining life.
Showing the prior period item inside normal expense heads without separate disclosure.
Students forget the presentation rule.
Fix: Disclose it separately, as a separate line in the statement of profit and loss or in the notes, with its nature and amount, so its impact on current profit or loss can be perceived.
Treating a change in estimate as a change in accounting policy.
Both involve a change in method or figure.
Fix: A policy is a principle or basis, such as the inventory formula. An estimate is a judgement about a figure, such as useful life. If unsure, AS 5 says to treat it as a change in estimate.

Worked examples

Example 1

In the year ended 31 March 2027, a company found that a purchase invoice of ₹2,40,000 for goods received in March 2026 was not recorded in the books. Assume the goods were sold before 31 March 2026, so none of them were in closing stock on that date. Profit before this item is ₹18,00,000. Explain the treatment and compute profit after the item.

Show the solution

Cause: the invoice was omitted in the earlier year. This is an omission, so it is a prior period item under AS 5.
Effect on 2025-26: the goods were sold in 2025-26 but the purchase was not recorded, and there was no closing stock to offset it. So 2025-26 cost of goods sold was understated and profit was overstated by ₹2,40,000. The supplier liability was also missing.
Effect on 2026-27: no part of this cost has been charged in 2026-27, so the profit before this item of ₹18,00,000 does not bear it.
Entry in 2026-27: debit Prior period expense (purchase omitted in 2025-26) ₹2,40,000 and credit Supplier ₹2,40,000. This recognises the expense that was missed last year.
Disclose ₹2,40,000 separately as a prior period expense, as a separate line in the statement of profit and loss or in the notes, with its nature and amount, so that its impact on current profit can be perceived.
The 2025-26 accounts are not reworked. The item goes through 2026-27 profit or loss.
Profit after the item = ₹18,00,000 − ₹2,40,000 = ₹15,60,000.

Answer: It is a prior period item. Charge ₹2,40,000 as a prior period expense in 2026-27, disclose it separately, and report profit of ₹15,60,000 after the item. This holds on the assumption that the goods were sold in 2025-26 and were not in 2025-26 closing stock.

Example 2

A machine costing ₹10,00,000 was bought on 1 April 2024 with a useful life of 10 years and nil residual value, using the straight-line method. On 1 April 2026, after reviewing technical advice, the company revises the total useful life to 8 years. Compute depreciation for 2026-27 and explain the treatment.

Show the solution

Original annual depreciation = ₹10,00,000 ÷ 10 = ₹1,00,000.
Depreciation for 2024-25 and 2025-26 = ₹1,00,000 × 2 = ₹2,00,000.
Book value on 1 April 2026 = ₹10,00,000 − ₹2,00,000 = ₹8,00,000.
Remaining life = 8 years − 2 years already used = 6 years.
Revised depreciation = ₹8,00,000 ÷ 6 = ₹1,33,333 (rounded).
Nature: revision from technical advice is new information, not an error. It is a change in estimate under AS 5, applied from 2026-27 onwards.
Earlier years are not reworked. Disclose the nature and amount of the material effect.

Answer: Depreciation for 2026-27 is ₹1,33,333 (rounded). It is a change in accounting estimate, applied prospectively, and the effect is disclosed if material.

Exam tips

In a distinguish question, give the definition, the cause, the treatment and the disclosure for each item, in that order.
In numerical questions, state the classification before the working. Examiners award marks for the correct classification.
When AS 5 treatment is asked, say that the item is recognised in the current period's profit or loss and the earlier years' accounts are not reworked.
For depreciation revisions, write the book value at the start of the year and the remaining life separately. Step marks depend on them.
In MCQs, read the cause of the change carefully. The same figure can be an error in one question and a revision in another.

Practice questions from AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Prior Period Items and Changes in Accounting Estimates: frequently asked questions

What is the difference between a prior period item and a change in accounting estimate?

A prior period item comes from an error or omission in an earlier period's statements. A change in estimate comes from new information or changed circumstances. A prior period item is disclosed separately in the current year's profit or loss. A change in estimate is taken into the current and future periods in the usual head.

How do you disclose prior period items in the statement of profit and loss?

Disclose them separately, either as a separate line item in the current year's statement of profit and loss or in the notes, with their nature and amount. AS 5 requires this so that users can perceive their impact on current period profit or loss.

Are prior period items restated in earlier financial statements?

The item is recognised in the current period and disclosed separately. You do not rework the earlier year's profit for it. Your answer should show the entry in the current year and the separate disclosure.

Is a change in useful life of an asset a change in policy?

No. A change in useful life is a change in accounting estimate. You apply the new life from the year of change over the remaining period, and you do not rework earlier years.