Subsequently on a review of the credit period allowed and financial capacity of the customers, the company decided to increase the provision to 8% on debtors as on 31.3.2004. The accounts were not approved by the Board of Directors till the date of decision. While applying the relevant accounting standard can this revision be considered as an extraordinary item or prior period item? 928 The preparation of financial statements involve making estimates which are based on the circum- stances existing at the time when the financial statements are prepared. It may be necessary to revise an estimate in a subsequent period if there is a change in the circumstances on which the estimate was based. Revision of an estimate, by its nature, does not bring the adjustment within the definition of a prior period item or an extraordinary item. In the given case, a limited company created 2.5% provision for doubtful debts for the year 20032004. Subsequently in 2004 they revised the estimates based on the changed circumstances and wants to create 8% provision. As per AS-5 (Revised), this change in estimate is neither a prior period item nor an extraordinary item. However, as AS-5 (Revised), also provides that a change in accounting estimate which has material effect in the current period, should be disclosed and quantified. Any change in the accounting estimate which is expected to have a material effect in later periods should also be disclosed. Problem What will be the treatment of the following in the final statement of account for the year 1.4 ended 31st March, 2005 of a limited company? (0) Revision in the salary, effective 1st April, 2004, would cost the company an additional liability of Rs. 3,00,000 per annum. (ii) It was found that an item of stock costing Rs. 50,000 had been included twice in the stock sheet as on 31st March, 2004. (iii) Due to price revision with effect from 1st October, 2004, the company has to receive Rs. 4,75,000 from its customers in respect of sales made in 2004-05. (CA Final, May, 1995, adapted)