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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

Rao Cements Ltd. reports the following for 2025-26: sales ₹80,00,000; cost of goods sold ₹52,00,000; other operating expenses ₹10,00,000; profit on sale of a surplus plot of land, an item of ordinary activity but of such size that its disclosure is relevant, ₹6,00,000. Which treatment does AS 5 require for the land profit?

The profit on sale of land arises from ordinary activities, so it stays within net profit, giving ₹24,00,000, and its nature and amount are disclosed separately because of its size. It is not extraordinary or a prior period item.

  1. ADisclose it separately as an extraordinary item below net profit
  2. BInclude it in net profit and disclose its nature and amount separately as an item of ordinary activitiesCorrect
  3. CTreat it as a prior period item and adjust opening reserves
  4. DOmit it from the statement of profit and loss and credit it to capital reserve directly

Explanation

When items of income or expense within ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain performance, AS 5 requires separate disclosure of nature and amount. They remain part of net profit, here 80,00,000 - 52,00,000 - 10,00,000 + 6,00,000 = ₹24,00,000. Calling it extraordinary is wrong because it arises from ordinary activities.

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