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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

Veda Textiles Ltd. discovered in the year ended 31 March 2026 that depreciation of Rs 2,00,000 for the year 2024-25 was omitted by mistake. The error was identified while preparing the 2025-26 accounts. As per AS 5, how should this item be treated?

The Rs 2,00,000 omitted depreciation is a prior period item. AS 5 requires it to be charged to the current year's Statement of Profit and Loss and disclosed separately with its nature and amount, so users can see its effect on current profit; direct adjustment to reserves is not allowed.

  1. ACharge Rs 2,00,000 to the Statement of Profit and Loss of 2025-26 and disclose it separately as a prior period itemCorrect
  2. BAdjust it directly against opening reserves without any disclosure
  3. CIgnore it because it is immaterial to the current year profit regardless of amount
  4. DTreat it as an extraordinary item in 2025-26 and not disclose the nature

Explanation

Omission of depreciation in an earlier period is a prior period item arising from an error. Under AS 5 it is included in determining the net profit or loss of the current period, and its nature and amount are disclosed separately so its impact on current results can be perceived. Adjusting reserves directly is not permitted by AS 5.

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