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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 the current year that depreciation of Rs 40,000 on a machine was omitted in the previous year's accounts because of a clerical oversight. Under AS 5, how should this item be treated in the current year's financial statements?

The Rs 40,000 omitted depreciation is a prior period item arising from an error. AS 5 requires it to be charged in the current year's statement of profit and loss and disclosed separately, so that users can see its effect on current profit. It is not adjusted through reserves.

  1. AAdjust opening reserves by Rs 40,000 without disclosing it in the statement of profit and loss
  2. BCharge Rs 40,000 in the current year's statement of profit and loss as a prior period item and disclose it separatelyCorrect
  3. CIgnore it because it is below the materiality limit prescribed in AS 5
  4. DRestate the previous year's financial statements and treat the item as an extraordinary item

Explanation

Omission of depreciation due to an error is a prior period item. AS 5 requires it to be included in determining the current period's profit or loss and disclosed separately so its impact on current results can be perceived. Adjusting reserves directly (option 1) is not permitted, and AS 5 has no fixed materiality limit.

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