Prior Period Items explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Clause 27(b) reports prior period items — income or expenditure of an earlier year credited or debited to the profit and loss account. An earlier-year liability that crystallised during the year is not one, and that distinction decides the answer.
From the ICAI Guidance Note on Tax Audit (Revised 2026), the concluding edition under the Income-tax Act, 1961. For tax years under the Income-tax Act, 2025 the particulars move to Form No. 26 under rule 47 of the Income-tax Rules, 2026.
Only for the mercantile system
Paragraph 48.1: the information under this clause is relevant only in those cases where the assessee follows the mercantile system of accounting. Under the cash system, expenses debited or income credited to the profit and loss account would be the current year's expenses or income even though they may relate to earlier years — because recognition follows payment or receipt, not the period to which the item belongs.
So the first question at clause 27(b) is the clause 13(a) answer. A cash-basis assessee has no prior period items to report.
Where the information comes from
Paragraph 48.2: the tax auditor should obtain the particulars of expenditure or income of an earlier year debited or credited to the profit and loss account of the relevant previous year.
| Assessee | Source |
|---|---|
| Accounts audited under any other law | The information may be available from the annual accounts — prior period items are a disclosure requirement there |
| Not required by any other law to be audited | A close scrutiny of the ledger in regard to the period for which the expenditure or income is entered in the account books may be necessary |
The difference in effort is considerable. For a company the statutory auditor has already identified the population; for a firm or proprietor the auditor has to find it from the narration and dates in the ledger.
The crystallisation distinction
Paragraphs 48.3 and 48.4 draw the line that the whole clause turns on:
"there is a difference between expenditure of any earlier year debited to the profit and loss account and the expenditure relating to any earlier year, which has crystallised during the relevant year. Material adjustments necessitated by circumstances which though related to previous periods but determined in the current period, will not be considered as prior period items."
And the consequence: though the expenditure may relate to an earlier year, it can be considered as arising during the year on the basis that the liability materialised or crystallised during the year — and such cases will not be reported under this clause. Similar consideration will apply in relation to income also.
Most amounts that look like prior period items are in fact current-year charges: a supplier's late invoice for last year's services, a price escalation agreed this year, an arbitration award for an old contract, an insurance claim settled this year. In each case the liability or entitlement was determined in the current period, so it is not a prior period item. What is reportable is narrower — and paragraph 48.5 says what it is.
What AS-5 and Ind AS 8 actually cover
Paragraph 48.5: under AS-5 / Ind AS 8, material charges (expenses) or credits (income) which arise in the current year as a result of errors or omissions in the accounts of the earlier years are considered prior period items or prior period errors.
That is the operative definition. The trigger is an error or omission in an earlier year's accounts — depreciation short-charged, a revenue entry missed, an expense recorded twice — not the mere fact that the underlying event belongs to an earlier period.
The auditor's enquiry, and what he does with the answer
Paragraph 48.5 continues: since the statutory auditor would normally take into consideration all items of prior period income and expenditure while giving his report on the financial statements, it would be advisable for the tax auditor to ascertain the circumstances under which a particular expenditure has not been considered as a prior period expenditure.
Two outcomes follow from that enquiry:
- If, on making the enquiries, he concludes that a particular item has to be treated as prior period expenditure, he should examine whether it has been correctly disclosed against this sub-clause.
- If the auditor is of the view that it is not a prior period item, the same may be disclosed in the observation para of the audit report.
The second limb is worth noting: a disagreement in the opposite direction — where the accounts treat something as a prior period item and the tax auditor does not — is resolved by an observation, not by silently omitting it from the clause.
The working paper
Paragraph 48.6 recommends the format in the e-filing utility: Sr. No. · type · particulars · amount · prior period to which it relates (year in yyyy-yy format).
The type column distinguishes income from expenditure — both are reportable — and the year column forces the auditor to identify which earlier period the error or omission belongs to, which is itself a test of whether the item is genuinely a prior period item.
Worked example
| Item charged this year | Prior period item? |
|---|---|
| Depreciation under-charged in the earlier year through a computation error, corrected now | Yes — an error in an earlier year's accounts |
| Rent invoice for last year received and booked this year, the liability having been agreed only now | No — crystallised in the current period |
| Price escalation for last year's supplies, accepted by the customer this year | No — determined in the current period; and if accepted and not credited, it is a clause 16(c) item |
| Sales invoice of the earlier year omitted from the books, recorded now | Yes — omission in an earlier year's accounts |
| Arbitration award for a contract of three years ago, decided this year | No — liability materialised this year |
| Assessee on the cash system, paying last year's electricity bill this year | No — clause 27(b) does not apply to a cash-basis assessee at all |
Audit checklist
- Check clause 13(a) first — clause 27(b) is relevant only on the mercantile system.
- For an assessee audited under another law, start from the annual accounts disclosure; otherwise scrutinise the ledger by period.
- Apply the AS-5 / Ind AS 8 test — an error or omission in an earlier year's accounts.
- Exclude items that crystallised during the current year, however old the underlying event.
- Ascertain why an item was not treated as prior period, rather than accepting the accounts' classification.
- Report income as well as expenditure.
- Record the year to which each item relates in yyyy-yy format.
- Where you disagree that an item is a prior period item, say so in the observation para.
Common mistakes
- Reporting every earlier-year expense booked this year.
- Missing prior period income, and reporting only expenditure.
- Copying the annual accounts disclosure without testing it against the crystallisation distinction.
- Answering the clause for a cash-basis assessee.
- Omitting the year to which the item relates.