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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 2026 that depreciation of Rs 2,00,000 for the previous year was omitted by mistake. Under AS 5, how should this item be treated in the 2025-26 financial statements?

The omitted depreciation is a prior period item. It is charged in the current year's statement of profit and loss and disclosed separately with its nature and amount, so that its impact on current profit can be assessed. Reserves are not adjusted directly.

  1. AAdjust opening reserves directly without showing it in the statement of profit and loss
  2. BShow it as a prior period item in the current year's statement of profit and loss, separately disclosed with its nature and amountCorrect
  3. CIgnore it because it relates to an earlier year
  4. DTreat it as an extraordinary item

Explanation

Under AS 5, prior period items are income or expenses arising in the current period from errors or omissions in preparing earlier period statements. They are included in determining current period profit or loss and disclosed separately. Adjusting reserves directly is not permitted under AS 5.

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