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The purpose of this accounting standard is to prescribe the criteria for
certain items in the statement of profit&loss so that comparability of the
financial statements can be enhanced.statement of profit&loss covers
the items of income and expenditure of that particular year/period.
For eg if we are preparing the statement of profit or loss for the year
ended31-03-2010 it means that the statement of profit or loss is
covering all the incomes/expenses related to1-04-2009 to31-03-2010.
However there may be a situation where a particular income or expense
appearing in the statement of profit or loss for theyearended31-03-2010
may not relate to the period01-04-2009to 31-03-2010.In that situation
what should be the accounting treatment& presentation of such items in
profit&loss is prescribed or explained in this accounting standard. It also
deals with change in accounting policies,accounting estimates and
extraordinary items.
Objectives of Accounting standard05
1. To prescribe the classification and disclosure of certain items.
2. To facilitate the comparability of the financial statements of different
3. To provide for classification and disclosure of ordinary/Extraordinary
items& prior period items.
4. To specify the accounting treatment for changes in accounting
5. To disclose the changes regarding the accounting policies in the
financial statements.
Components of Net profit:
Net profit or loss for the period consists of two
1. profit or loss from ordinary activities.
2. Extraordinary items.
3. Ordinary activities are defined as any activities which are
undertaken by any enterprise as part of its business and incidental to
main business.Normally all items of incomes and expenses which are
recognized in a period are included in the determination of the net profit
Or loss for the period.This includes Extraordinary items and changes in
accounting estimates. The Extraordinary items are incomes or expenses
that arise from events or transactions that is not likely to recur
frequently or regularly and is different from ordinary activities.
Examples of Extraordinary items are:1.Loss due to Earthquakes.
2. Attachment of property.
3. Govt grants becoming refundable.
4. Govt grants for giving immediate financial support with no further
5. Govt grants receivable as compensation for expenses or losses
incurred in previous accounting period.
Prior period items are income or expenses which arise in current
period as a result of errors or omissions in the preparation of financial
statements of one more prior periods.Either they are included in the
determination of net profit or loss for the current period or shown as
items in the statement of profit or loss after determination of current
net profit or loss.The examples of prior period items are:
1Errors in calculation in providing income or expenses
2Omission to account for income or expenditure.
4. Non provision for salary due in earlier years.
5. Applying incorrect rate of depreciation etc
Accounting Estimates:
As a result of uncertainties inherent in business activities many items in
financial statements cannot be measured with precision but can only be
estimated which needs latest information.The use of reasonable
estimates is an essential part of the preparation of financial statements.
Change in accounting estimate:
It means that estimate is to be revised due to changes in the
circumstances/conditions on which the estimates were based.Examples:
1. Estimating the useful life of the asset.
2. Estimation of provision of any liability.
3. Computing income tax provision.etc The effect of changes in
accounting estimates should be classified into
A) change in ordinary activities
B) Change in Extraordinary activities should be shown separately,should
be included in the determination of net profit or loss in the current
period if it effects that period or in future period if it effects future
period or both.
Change in accounting policies:The accounting policies may be changed
by the companies:
1. For the compliance of accounting standard.
2. For the compliance of statue or law.
3. For better &appropriate presentation of financial statements.
1. The items of income and expense within profit or loss from ordinary
activities if their disclosure is relevant they should be disclosed.
2. The nature and amount of each Extraordinary item is to be disclosed
and their impact on profit or loss should be perceived.
3. Separate disclosure of items such as Profit or loss on sale of fixed
assets,long term investments,litigation settlements etc
4. The nature and amount of prior period items and their impact on
profits should be disclosed.
5. Changes in accounting estimate sand their impact on profit should
also be disclosed.
6. Changes in accounting policies and their impact on profit should be
7. If the effect of change is not ascertainable a statement to that
effect is to be submitted.