Prior period expense
This query is : Resolved
13 October 2011
Hi
i have the querry about payment of discretionary bonus. in last year, company paid bonus to employees but not provided for Q4 as it was approved and paid after balance sheet date but before approval of accounts by board.
in current year, company has paid the bonus fro Q4 of last year and also provided for it for Q4 in current year which also approved and paid after balance sheet date in line with AS-4 As - Contingencies and Events Occurring After the Balance Sheet Date
Will the bonus paid for last year will be prior period for accounts purpose.
Can company claim the bonus paid for last year in current year return (if shown as priod period item in financial statements) arguing that the actual liability for paying bonus was established in current year as it is descretionary.
Please advise and suggest case laws if any available.
Thanks in advance
i have the querry about payment of discretionary bonus. in last year, company paid bonus to employees but not provided for Q4 as it was approved and paid after balance sheet date but before approval of accounts by board.
in current year, company has paid the bonus fro Q4 of last year and also provided for it for Q4 in current year which also approved and paid after balance sheet date in line with AS-4 As - Contingencies and Events Occurring After the Balance Sheet Date
Will the bonus paid for last year will be prior period for accounts purpose.
Can company claim the bonus paid for last year in current year return (if shown as priod period item in financial statements) arguing that the actual liability for paying bonus was established in current year as it is descretionary.
Please advise and suggest case laws if any available.
Thanks in advance
13 October 2011
I think it should be disclosed as a prior period expenditure as the conditions existed at the balance sheet date.
It is normally a policy of the company to give bonus to the employees, whether more of less.
Just terming the bonus as dicretionary it cannot be said that the conditions did not exist at the balance sheet date. Hence disclose the bonus so paid as prior period expenditure in the account.
The deduction for bonus is allowed on payment basis. The last years bonus paid in the current year (whether or not provided in last year, but expensed off till the time of payment) will be allowed as deduction in the FY in which payment is actually made.
For the current year bonus provided but unpaid, deduction is to be claimed in the year of payment.
It is normally a policy of the company to give bonus to the employees, whether more of less.
Just terming the bonus as dicretionary it cannot be said that the conditions did not exist at the balance sheet date. Hence disclose the bonus so paid as prior period expenditure in the account.
The deduction for bonus is allowed on payment basis. The last years bonus paid in the current year (whether or not provided in last year, but expensed off till the time of payment) will be allowed as deduction in the FY in which payment is actually made.
For the current year bonus provided but unpaid, deduction is to be claimed in the year of payment.
14 October 2011
Thanks Sumit
14 October 2011
Can i have some more views on the topic
10 August 2024
### **Handling Discretionary Bonus and Prior Period Expenses**
### **1. Accounting for Discretionary Bonus**
**A. **Accounting Treatment:**
- **AS-4 (Contingencies and Events Occurring After the Balance Sheet Date):** According to AS-4, if a bonus is declared and paid after the balance sheet date but before the approval of accounts, it should be considered for accounting purposes.
- **Treatment in Previous Year:** If the bonus pertains to Q4 of the previous financial year but was not provided for in the previous year’s accounts, it will be treated as a prior period expense in the current year’s financial statements.
**B. **Current Year Treatment:**
- **Provision in Current Year:** The bonus should be provided for in the current year if it is paid in the current year. This provision should be disclosed in the financial statements of the current year.
### **2. Prior Period Expenses**
**A. **Disclosure:**
- **In Financial Statements:** For the previous year's bonus, disclose it as a prior period expense in the Notes to Accounts of the current year's financial statements. This reflects that the expense pertains to a prior year but was recognized in the current year.
- **Accounting for Bonus:** The amount should not be debited to the current year's Profit & Loss Account but should be shown as a separate item in the Notes to Accounts.
**B. **Tax Treatment:**
- **Income Tax Return:** The bonus paid for the previous year but accounted for in the current year can be claimed as a deduction in the current year's tax return. This is because the liability for the bonus was established in the current year when it was actually paid and approved.
**C. **Legal Precedents:**
- **Relevant Case Law:** There are various case laws and judicial pronouncements on similar issues. For instance:
- **CIT vs. Mahalakshmi Textile Mills Ltd.** (1967): The Supreme Court held that expenditure can be claimed in the year in which the liability is established.
- **CIT vs. Bangalore Woolen, Cotton & Silk Mills Ltd.** (1967): The court supported the principle that expenses should be accounted for in the year when the liability is created, irrespective of when the actual payment is made.
### **3. Practical Steps for Compliance**
**A. **Accounting Entry:**
- **For Prior Period Expenses:** Debit the prior period expense account and credit the bank or cash account in the current year’s books.
- **For Current Year Provision:** Debit the current year’s Profit & Loss Account for the provision of the bonus and credit the bonus payable account.
**B. **Financial Statements Disclosure:**
- **Notes to Accounts:** Provide a detailed note explaining the prior period expense, including the amount and nature of the expense.
- **Example Note:**
```markdown
**Note X: Prior Period Expenses**
The company has incurred a bonus expense amounting to ₹XX,XXX, which pertains to the financial year ended March 31, XXXX but was paid and recognized in the current financial year. This has been disclosed as a prior period expense in the Notes to Accounts.
```
### **Summary**
1. **Accounting for Discretionary Bonus:**
- Treat the bonus paid for the previous year as a prior period expense if it was not provided for in the previous year’s accounts but was paid in the current year.
- Provision for the bonus in the current year’s financial statements should be made appropriately.
2. **Tax Deduction:**
- You can claim the bonus paid for the previous year in the current year’s tax return as it is deductible when the liability is established and payment is made.
3. **Disclosure:**
- Disclose the prior period expense separately in the Notes to Accounts of the current year’s financial statements.
For specific cases and detailed advice, consulting with a professional accountant or tax advisor is recommended.
### **1. Accounting for Discretionary Bonus**
**A. **Accounting Treatment:**
- **AS-4 (Contingencies and Events Occurring After the Balance Sheet Date):** According to AS-4, if a bonus is declared and paid after the balance sheet date but before the approval of accounts, it should be considered for accounting purposes.
- **Treatment in Previous Year:** If the bonus pertains to Q4 of the previous financial year but was not provided for in the previous year’s accounts, it will be treated as a prior period expense in the current year’s financial statements.
**B. **Current Year Treatment:**
- **Provision in Current Year:** The bonus should be provided for in the current year if it is paid in the current year. This provision should be disclosed in the financial statements of the current year.
### **2. Prior Period Expenses**
**A. **Disclosure:**
- **In Financial Statements:** For the previous year's bonus, disclose it as a prior period expense in the Notes to Accounts of the current year's financial statements. This reflects that the expense pertains to a prior year but was recognized in the current year.
- **Accounting for Bonus:** The amount should not be debited to the current year's Profit & Loss Account but should be shown as a separate item in the Notes to Accounts.
**B. **Tax Treatment:**
- **Income Tax Return:** The bonus paid for the previous year but accounted for in the current year can be claimed as a deduction in the current year's tax return. This is because the liability for the bonus was established in the current year when it was actually paid and approved.
**C. **Legal Precedents:**
- **Relevant Case Law:** There are various case laws and judicial pronouncements on similar issues. For instance:
- **CIT vs. Mahalakshmi Textile Mills Ltd.** (1967): The Supreme Court held that expenditure can be claimed in the year in which the liability is established.
- **CIT vs. Bangalore Woolen, Cotton & Silk Mills Ltd.** (1967): The court supported the principle that expenses should be accounted for in the year when the liability is created, irrespective of when the actual payment is made.
### **3. Practical Steps for Compliance**
**A. **Accounting Entry:**
- **For Prior Period Expenses:** Debit the prior period expense account and credit the bank or cash account in the current year’s books.
- **For Current Year Provision:** Debit the current year’s Profit & Loss Account for the provision of the bonus and credit the bonus payable account.
**B. **Financial Statements Disclosure:**
- **Notes to Accounts:** Provide a detailed note explaining the prior period expense, including the amount and nature of the expense.
- **Example Note:**
```markdown
**Note X: Prior Period Expenses**
The company has incurred a bonus expense amounting to ₹XX,XXX, which pertains to the financial year ended March 31, XXXX but was paid and recognized in the current financial year. This has been disclosed as a prior period expense in the Notes to Accounts.
```
### **Summary**
1. **Accounting for Discretionary Bonus:**
- Treat the bonus paid for the previous year as a prior period expense if it was not provided for in the previous year’s accounts but was paid in the current year.
- Provision for the bonus in the current year’s financial statements should be made appropriately.
2. **Tax Deduction:**
- You can claim the bonus paid for the previous year in the current year’s tax return as it is deductible when the liability is established and payment is made.
3. **Disclosure:**
- Disclose the prior period expense separately in the Notes to Accounts of the current year’s financial statements.
For specific cases and detailed advice, consulting with a professional accountant or tax advisor is recommended.
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