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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 Textiles Ltd. discovered in 2025-26 that it had omitted to charge Rs 40,000 of depreciation on a machine for 2024-25 because of an arithmetical slip. Under AS 5, how should this item be treated in the 2025-26 statement of profit and loss?

The omitted depreciation of Rs 40,000 is a prior period item under AS 5. It is charged in the 2025-26 statement of profit and loss and disclosed separately with its nature and amount, so that its impact on current profit can be understood by users.

  1. AAdjust it directly against opening reserves without showing it in the statement of profit and loss
  2. BIgnore it because the amount is small
  3. CCharge it in 2025-26 as a prior period item, separately disclosed with its nature and amountCorrect
  4. DRestate the 2024-25 financial statements and show no item in 2025-26

Explanation

AS 5 defines prior period items as income or expenses arising in the current period from errors or omissions in preparing financial statements of one or more prior periods. The Rs 40,000 is charged in 2025-26 and separately disclosed. Adjusting reserves directly is not permitted under AS 5.

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