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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 in 2025-26 that closing stock of 2024-25 had been overstated by Rs 3,00,000 because of a counting error. Under AS 5, how should the correction be treated in the 2025-26 financial statements?

The Rs 3,00,000 overstatement is a prior period item. It is charged in the 2025-26 statement of profit and loss and disclosed separately with nature and amount, because AS 5 requires prior period items to flow through current period profit rather than adjust reserves directly.

  1. AAdjust opening reserves by Rs 3,00,000 without disclosure in the statement of profit and loss
  2. BCharge Rs 3,00,000 in the 2025-26 statement of profit and loss and disclose it separately as a prior period itemCorrect
  3. CTreat it as an extraordinary item in 2025-26 and show it after net profit
  4. DIgnore it as the 2024-25 accounts are already approved

Explanation

Under AS 5, an error in a previous period's stock is a prior period item. It is included in determining the net profit or loss of the current period, here as a Rs 3,00,000 charge, and disclosed separately with its nature and amount so its impact is visible. Adjusting reserves directly is not the AS 5 treatment.

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