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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 the closing inventory at 31 March 2025 had been overstated by Rs 4,00,000 because of a counting error. The error is an omission or misstatement in prior period financial statements. As per AS 5, how should the item be treated in the 2025-26 statement of profit and loss?

The Rs 4,00,000 overstatement of opening inventory is a prior period item. Under AS 5 it is included in determining current year profit or loss but shown separately with its nature and amount, so that its effect on current results can be understood.

  1. AAdjust the opening reserves directly without showing it in the statement of profit and loss
  2. BIgnore it since it relates to an earlier year and is not material
  3. CTreat it as an extraordinary item of Rs 4,00,000
  4. DShow it as a prior period item of Rs 4,00,000 separately in the current year's statement of profit and loss with its nature and amount disclosedCorrect

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. They are included in determining the current period profit or loss and separately disclosed. Adjusting reserves directly is not the AS 5 treatment, and extraordinary items arise from events outside ordinary activity, not from errors.

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