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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

Sundaram Pharma Ltd. had estimated a customer's receivable of Rs 6,00,000 as recoverable in 2024-25. In 2025-26 the customer became insolvent and the whole amount is written off. Under AS 5, how should this be treated?

The write-off is a change in accounting estimate, charged to the 2025-26 statement of profit and loss as an ordinary item. It arises from new information about recoverability, not from an error or omission, so it is neither a prior period nor an extraordinary item.

  1. AAs a prior period item because it relates to a 2024-25 sale
  2. BAs an extraordinary item because it is unusual
  3. CAs a change in accounting estimate, charged in 2025-26 profit and loss as part of ordinary activitiesCorrect
  4. DAs a change in accounting policy requiring restatement

Explanation

Estimates such as bad debts depend on circumstances and may need revision as new information emerges. Writing off the receivable is a revision of an estimate and is not an error. It is charged in the current period as an ordinary item, since it does not arise from events clearly distinct from ordinary activities. Prior period item treatment applies only to errors or omissions.

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