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

Ananya Textiles Ltd. discovered during 2025-26 that depreciation of ₹2,00,000 on a machine for the year 2024-25 was omitted by mistake. The omission is material to the 2024-25 figures and was found only after those statements were approved. How should the amount be treated in the 2025-26 financial statements under AS 5?

The omitted depreciation is a prior period item under AS 5. It is charged in the 2025-26 statement of profit and loss and disclosed separately, so users can see its effect on current profit. Direct adjustment to reserves or ignoring it is not allowed.

  1. ACharged to the 2025-26 statement of profit and loss as a prior period item, disclosed separatelyCorrect
  2. BAdjusted directly against opening reserves without any disclosure
  3. CIgnored because the 2024-25 accounts were already approved
  4. DShown as an extraordinary item in 2025-26

Explanation

Under AS 5, prior period items are income or expenses arising in the current period from errors or omissions in preparing earlier period statements. The omitted depreciation of ₹2,00,000 is charged in the current year's profit and loss and disclosed separately so its effect on current profit can be perceived. Adjusting reserves directly is not permitted.

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