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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. is preparing its statement of profit and loss for the year ended 31 March 2026. Which of the following items would be classed as a 'prior period item' under AS 5?

The omitted electricity charges for February 2025 booked in the current year are a prior period item. AS 5 treats income or expenses arising from errors or omissions in earlier years' financial statements as prior period items, whereas changes in estimates and current-year events are not.

  1. AA short provision of Rs 40,000 for depreciation discovered during the year because the asset's useful life was re-estimated
  2. BRs 75,000 of electricity charges for February 2025 that were omitted from the books of the previous year through an error and booked in the current yearCorrect
  3. CRs 1,20,000 loss on sale of a machine during the current year
  4. DRs 30,000 bad debt written off in the current year against a debtor created in the previous year, where the debtor became insolvent in the current year

Explanation

AS 5 defines prior period items as income or expenses arising in the current period as a result of errors or omissions in preparing financial statements of one or more prior periods. The omitted February 2025 electricity charge is such an omission. Revised useful life and insolvency of a debtor are changes in estimates or current events, not errors, and the loss on sale is an ordinary current transaction.

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