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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

Kaveri Textiles Ltd. discovered during 2025-26 that closing stock of 31 March 2025 had been overstated by Rs 4,00,000 because of a counting error. The amount is material, and the error is a prior period item per AS 5. How should the correction be treated in the 2025-26 financial statements?

The Rs 4,00,000 overstatement of opening stock is a prior period item. AS 5 requires it to be included in the current period's profit or loss and disclosed separately, with its nature and amount, so that the effect on current profit can be seen.

  1. AAdjust the opening reserves directly without any disclosure
  2. BInclude Rs 4,00,000 in the current year's profit or loss as a separately disclosed prior period itemCorrect
  3. CIgnore it because the books for 2024-25 are already closed
  4. DRestate 2024-25 as a change in accounting policy

Explanation

Under AS 5, prior period items are included in determining the net profit or loss of the current period and shown separately with their nature and amount. Adjusting reserves directly is not permitted. An error is not a change in accounting policy, and ignoring a material item is wrong.

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