Introduction: Why AS 5 Is Important

Many items appear in the Profit & Loss Account that do not belong to normal business operations or do not relate to the current year.

AS 5 helps us answer:

• What should be included in current year profit?
• What belongs to prior years?
• What is so unusual that it must be shown separately?

In short: AS 5 ensures clarity, comparability, and honesty in reported profits.

Objective of AS 5

To prescribe:

• The basis for determining net profit or loss for a period
• Disclosure and treatment of:
• Prior Period Items
• Extraordinary Items
• Changes in Accounting Estimates

Net Profit or Loss for the Period

Net Profit or Loss includes:

• All income and expenses arising in the ordinary course of business
• After considering adjustments required by Accounting Standards

Example:

• Sales revenue
• Cost of goods sold
• Administrative expenses
• Depreciation

All these form part of normal profit calculation.

Prior Period Items (Very Important Topic)

Prior Period Items are:

Income or expenses that arise in the current period but relate to errors or omissions of one or more prior periods.

Examples of Prior Period Items

• Salary of last year omitted and paid this year
• Electricity expense of previous year booked this year
• Income understated in earlier year due to mistake

These arise only because of errors or omissions, not because of estimates.

Treatment of Prior Period Items

• Should be separately disclosed in the P&L Account
• Their nature and amount must be clearly shown

Example disclosure:

“Prior period expenses amounting to ₹50,000 relating to salary omitted last year.”

Extraordinary Items

Extraordinary items are:

Income or expenses arising from events that are clearly distinct from ordinary activities and not expected to recur frequently.

Examples of Extraordinary Items

• Loss due to earthquake or flood
• Compensation received due to nationalisation
• Loss from expropriation of assets

Not Extraordinary:

• Loss due to fire (normal business risk)
• Strike by workers
• Theft

Treatment of Extraordinary Items

• Disclosed separately in the P&L Account
• Nature and amount clearly mentioned

This helps users understand normal business performance.

Also Read:- AS 4: Events After Balance Sheet Date Explained

Changes in Accounting Estimates

Accounting estimates are approximations used due to uncertainty.

Examples:

• Useful life of an asset
• Provision for doubtful debts
• Warranty provisions

Treatment

• Effect of change is included in:
• Current period, or
• Current + future periods (if applicable)
• No retrospective adjustment

Example:
Change in estimated life of machinery → Depreciation revised prospectively.

Important Distinction (Exam Favourite)

• Basis Prior Period Item Accounting Estimate
• Reason Error or omission New information
• Period affected Past Present/Future
• Adjustment Separate disclosure Prospective
• AS Covered AS 5 AS 5

Common Student Mistakes

• Treating change in estimate as prior period item
• Classifying fire loss as extraordinary
• Not disclosing prior period items separately
• Mixing AS 4 and AS 5 concepts

Exam Tip

If asked:

“Distinguish between Prior Period Items and Extraordinary Items”

Write:

• Definition
• Reason for occurrence
• Accounting treatment
• Examples

This alone can fetch full marks.

“True profit is not what looks good — it’s what remains after full and fair disclosure.” – CA Rohit Sethi