Question 1 (b)
Prior period items
3 marks
- Time to write
- About 6 minutes
- Notes
- Crux notes
Question
Question 1 (b) · 3 marksWhat does the expression "prior period item" mean? Illustrate it with two examples.
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- two examplesThe question fixes the number: two examples. Give that many, each under its own heading.
- What…?Illustrate…Two asks in one question: answer both.
- IllustrateExamples are asked for: one short example with each point.
Write it in this order
- 1 Meaning of a prior period item error or omission in an earlier period 1 mark 1 min
- 2 Example 1 omitted purchase invoice 1 mark 2 min
- 3 Example 2 depreciation at the wrong rate 1 mark 2 min
- Check: every ask answered, key terms underlined 1 min
Easy marks
- Meaning of a prior period item (step 1, 1 mark): a definition in one or two lines. It opens the answer, so it takes a minute or two.
Try it first. About 6 minutes for 3 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Meaning
A prior period item is an income or an expense that arises in the current period as a result of an error or an omission in preparing the financial statements of one or more earlier periods. The amount belongs, in substance, to an earlier year; it surfaces now only because that year's accounts got it wrong.
The topic is governed by AS-5, whose full title is Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.
Beyond the question: why it matters, and why it is disclosed separately. Profit for a period is arrived at by matching the revenues of that period against the costs of securing them. An amount belonging to an earlier year, dropped without comment into this year's Profit & Loss Account, breaks that matching twice over: it distorts the current year's result and leaves the earlier year's overstated result unexplained. It is therefore shown separately, with its nature and amount, so that a reader can see the profit from the current period's own ordinary activities. That is an application of the ordinary disclosure test: items the knowledge of which might influence the decisions of the users of the financial statements are disclosed in them.
Two examples
1. An omitted purchase invoice. A supplier's invoice for ₹90,000 of goods received in the year ended 31 March 2022 was never entered, and is discovered after those accounts were finalised. The 2021-22 expenses were understated and its profit therefore overstated by ₹90,000. The ₹90,000 is charged in 2022-23 as a prior period item.
2. Depreciation charged at the wrong rate. Machinery costing ₹8,00,000 should have been depreciated at 15% in 2021-22 but was charged at 10%: ₹1,20,000 was due, ₹80,000 was charged, so ₹40,000 was under-provided. The shortfall is charged in 2022-23 as a prior period item.
Beyond the question: the property that identifies one
Both corrections take back in the current year exactly what the earlier year overstated: ₹90,000 + ₹40,000 = ₹1,30,000 charged now against ₹1,30,000 of earlier overstatement. The two years taken together are unaffected: only the split between them was wrong. That is the signature of a prior period item.
Beyond the question: the line it must not be confused with
A change in an accounting estimate: revising the remaining useful life of that same machine, say: is not a prior period item. Nothing done earlier was wrong; better information has simply arrived. No earlier year is corrected, and the whole effect falls in the current and future periods.
Where the 3 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Meaning of a prior period item (error or omission in an earlier period) | 1 |
| 2 | Example 1 (omitted purchase invoice) | 1 |
| 3 | Example 2 (depreciation at the wrong rate) | 1 |
| Total | 3 |
Report a problemopens an email to admin@getkunji.com with the question ID1406-Q1balready filled in.