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Prior period item

Himanshu (Student) (48 Points)

03 August 2010

Query: A company carrying a business of establishing pipelines beneath the surface. It made a contract with another company to place the pipelines for which that company agreed to give a sum of Rs. 10 lakh. During initial stages company expected the total costs will be upto Rs. 5 lakh and the rest will be their profit.

At the time of digging the workers found a rocky surface coming in between of their site. Thus to destruct that, the company purchased dynamites due to which it went high on costs and the total cost came out to be Rs. 15 lakh. Because of which the company suffered a loss of Rs. 5 lakh.

Will this be a prior period item or not?

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2 Replies

Harpreet (* * * * * *) (1670 Points)
Replied 03 August 2010

Prior Period Adjustment/Expenses means the expenses incurred for previous year (Say 09-10) for which you had not made provision in the books of account and now your balance sheet is finalized and after finalize you have got these bills so you now have to book the same in current year (say 10-11). That is called prior period adjustment/expenses.

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Rineesh Raghavan (MD) (108 Points)
Replied 03 August 2010

Hi Himanshu

Point No. 1: What is Prior Period Item?

They are result of errors / omissions in the preceding financial years, accounted for in the current year. Therefore, the example quoted by you is not covered by AS 5 - Prior Period Item.

Point No.2: If not prior period item, what else?

The information seems to suggest that it is covered by AS 7 Accounting for Construction Contract. Therefore, in terms of AS 7, the anticipated loss of Rs.5 Lakhs should be provided for immediately. The information may also be considered under AS 4, events after Balance Sheet date, for appropriate disclosure.

Rineesh