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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

Sunrise Textiles Ltd. discovered in the year ended 31 March 2025 that depreciation of Rs 2,40,000 on a machine, relating to the year ended 31 March 2024, had been omitted by mistake. As per AS 5, how should this item be treated?

The omitted depreciation is a prior period item under AS 5 because it arises from an error in an earlier year's statements. It is charged in the current year's profit or loss and disclosed separately, with its nature and amount, rather than adjusted to reserves or treated as extraordinary.

  1. ADisclose as a prior period item and show it separately in the statement of profit and loss of the current yearCorrect
  2. BTreat it as an extraordinary item in the current year
  3. CAdjust it directly against opening reserves without any disclosure
  4. DIgnore it because the amount relates to a closed year

Explanation

Under AS 5, prior period items are 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 current period profit or loss and disclosed separately with their nature and amount. Treating it as extraordinary is wrong because it does not arise from events outside the enterprise's ordinary activities.

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