EITHER Sneha an employee of Omre Limited went on maternity leave with pay for 9 months on 1 st January 2024 up to 30 th September 2024. Her monthly…

Either As per AS- 5 "Net Profit or Loss for the Period", Prior Period Items and Changes in Accounting Policies, the term 'prior period items', refers to income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. The nature and amount of prior period items should be separately disclosed in the statement of profit and loss so that their impact on the current profit or loss can be perceived. Hence, in this case salary paid to Sneha for 3 months i.e. 1.1.2024 to 31.3.20244,50,000 (1,50,000 x 3) will be classified as prior period item in FY 2024 -25 and following journal entry shall be passed: (i) Journal entry in FY 2024-25 Salary A/c (₹ 1,50,000 x 6) Dr. 9,00,000 Prior period item (₹ 1,50,000 x 3) Dr. 4,50,000 To Bank A/c 13,50,000 (Being salary related to 9 months paid out of which 3 month's salary is prior period item) Alternative Entry Prior Period Item (₹ 1,50,000 x 3) Dr. 4,50,000 To Bank A/c 4,50,000 (Being Salary related to 3 month's salary is prior period item) Salary A/c (₹ 1,50,000 x 6) Dr. 9,00,000 To Bank A/c 9,00,000 (Being salary related to 6 month's salary) (ii) AS 5 inter alia states that the term 'prior period items' does not include other adjustments necessitated by circumstances, which though related to prior periods, are determined in the current period. Accordingly, in the second case though Sneha was terminated on 1.1.2024 i.e. in 2023- 2024, yet she was reinstated due to court's order in 2024-2025, with the instruction by the court to pay the salary for the intervening period i.e. with retrospective effect from January, 2024. The adjustment of salary of 4,50,000 (for January 2024 to March, 2024) would not be considered as prior period item and will be accounted for in the books as current year expense. Thus, the entire amount of Salary of 13,50,000 for January, 2024 to September, 2024 is a current year expense only. Salary A/c (1,50,000 x 9) Dr. 13,50,000 To Bank A/c 13,50,000 (Being 9 month's salary paid during the year) (a) Or Key Elements of Financial Statements 1. Assets: An asset is a resource controlled by the enterprise from past events, expected to bring future economic benefits (e.g., plant, patents, receivables). 2. Liabilities: A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow of a resource embodying economic benefits. (e.g., borrowings, provisions). 3. Equity: Equity is defined as residual interest in the assets of an enterprise after deducting all its liabilities. It is important to avoid mixing up liabilities with equity. Equity is the excess of aggregate assets of an enterprise over its aggregate liabilities. In other words, equity represents owners' claim consisting of items like capital and reserves, which are clearly distinct from liabilities, i.e. claims of parties other than owners. The value of equity may change either through contribution from/distribution to equity participants or due to income earned/expenses incurred (capital, reserves). 4. Income/Gain: Income is Increases in economic benefits through inflow of assets or reduction of liabilities, leading to increase in equity (includes revenue & gains). 5. Expenses/Loss: An expense is decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decrease in equity other than those relating to distributions to equity participants. The definition of expenses encompasses expenses that arise in the ordinary course of activities of the enterprise, e.g. wages paid. Losses may or may not arise in the ordinary course of activity of the enterprise, e.g. loss on disposal of Property, Plant and Equipment. Losses are separately shown in the statement of profit and loss because this knowledge is useful in assessing performance of the enterprise.