Short notes: prior period items; money measurement concept

Notes (i) and (ii) are written.

Note (i): Prior period items

Meaning. A prior period item is an income or expense that arises in the current period because of an error or omission in preparing the financial statements of one or more earlier periods. The amount belongs, in substance, to an earlier year and surfaces now only because that year's accounts got it wrong. The subject is governed by AS-5, whose title is Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.

Why it is shown separately. Profit for a period is found by matching the revenues of that period with the costs of earning them. An amount that belongs to an earlier year, mixed silently into this year's figures, breaks that matching twice: it distorts the current profit and leaves the earlier error unexplained. So its nature and amount are disclosed separately in the current year's Profit & Loss statement, in a way that shows its effect on current profit.

Illustration. Rent of ₹48,000 receivable for 2022-23 was omitted from that year's accounts and is discovered in 2023-24. The 2022-23 profit was understated by ₹48,000; the ₹48,000 is brought in during 2023-24 as a prior period item, shown separately. Over the two years taken together nothing changes: only the split between them was wrong.

Not to be confused with a change in an accounting estimate (such as a revised useful life), which is not an error and is not a prior period item.

Note (ii): Money measurement concept

Meaning. Accounting records only those facts that can be expressed in terms of money; events on which a precise money value cannot be put are left out, however important they may be. Since money is the medium of exchange and the standard of economic value, only transactions capable of being measured in money are recorded in the books.

Why it matters. Money gives a common denominator, so items as different as machine hours, raw materials and skilled labour can be added up and compared.

Limitations.

1. Qualitative facts are ignored: a strike starting, a rival's better product or poor relations among managers go unrecorded, so accounts do not give a complete picture of the business.
2. Money is recorded at its value on the date of the transaction; later changes in its purchasing power (inflation or deflation) are not reflected.

Example. The purchase of a machine for ₹2,00,000 is recorded; the skill and loyalty of the operator who runs it, however valuable, is not.