ERROR IN DEPRECIATION CALCULATION IN PREVIOUS YEAR COMPANY'S BOOKS

This query is : Resolved

Quick Summary

Understated depreciation in prior year cannot be reversed in current year. Record as prior period item under AS 5 or restate under Ind AS 8. It reduces reported profit, corrects asset values, and requires disclosure; no direct cash loss.

lingam

lingam (Querist)
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13 April 2026 Dear Sir,

In previous year depreciation calculation understated in company's books over sightly as per company act, now can i reverse the difference amount in current financial year and does it affect any financial loss to the company.

Thanks and Regards

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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13 April 2026 If you have already closed and finalised the books for the previous year, you cannot simply "reverse" the amount as current-year depreciation. Instead:
For Companies under Accounting Standard (AS) 5: You must record it as a "Prior Period Item" in the current year's Statement of Profit and Loss. It should be shown separately so that its impact on the current year's profit is clear to stakeholders.
For Companies under Indian Accounting Standard (Ind AS) 8: You must use Retrospective Restatement. This involves restating the comparative amounts for the previous year(s) and adjusting the opening balance of retained earnings for the earliest period presented.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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13 April 2026 Correcting the error does not cause an actual cash outflow (out-of-pocket loss), but it does affect your financial reporting:
Reduction in Reported Profit: Because depreciation is an expense, correcting an understatement will reduce your net profit and retained earnings for the period it relates to.
Tax Impact: Understated depreciation in the books may mean you have already paid more tax than necessary if the same error occurred in your tax filings. Correcting it helps align book values with actual asset usage.
Balance Sheet Accuracy: The "Carrying Value" (Net Block) of your assets is currently overstated; correcting it ensures your balance sheet reflects the true value of your assets.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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13 April 2026 If the amount is "slight" or immaterial, it can often be corrected in the current period without elaborate restatements.
You must disclose the nature of the error and the amount of the correction in the notes to your financial statements to remain compliant with the Companies Act.

lingam

lingam (Querist)
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17 April 2026 Thank you very much sir

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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17 April 2026 You are welcome.

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