The concept of an accounting period is used to segment the life of a business into equal pieces. Accounting periods must conform to the principle of consistency. Show
Accounting Period: ExplanationAccounting periods are used to estimate the profit, loss, and financial position of a business for a specific time window. If different accounting periods are used, then problems can arise in terms of calculating profits and the comparability of incomes and expenses. Therefore, to study the results of a business, its life is divided into short periods of equal length. Each of these periods is known as an accounting period. While the true profit or loss of a business can only be determined when the business finally closes down, it is clearly unwise to wait that long before learning about its financial health. Accounting information is required regularly by all stakeholders. Therefore, it should be prepared on an ongoing basis. To ensure that there is a reliable and comparable set of financial statements, the performance and position of a business are measured at the end of the accounting periods. Generally, an accounting period lasts one year. Hence, an income statement shows the company’s financial performance over one year, while a balance sheet shows the financial position at the end of a year. The year may not necessarily be a calendar year. For example, it may run from January to December or from the July of one year to the June of the next. The fact that financial statements are prepared according to accounting periods necessitates certain adjustments. For example, when a car is purchased, its cost must be apportioned over the various accounting periods in which it will be used. The accounting period principle requires that such adjustments are made judicially and that an accounting record is created accordingly. Learn from an expertWant to learn more about other financial concepts? Get in touch with a financial advisor in St. Louis, MO or visit our financial advisor page to see other areas we cater to. Frequently Asked QuestionsWhat is an accounting period?The concept of an accounting period is used to segment the life of a business into equal pieces. Accounting periods must conform to the principle of consistency. How often should accounting information be prepared?Accounting information is required regularly by all stakeholders. Therefore, it should be prepared on an ongoing basis. How to ensure that there is a reliable and comparable set of financial statements?The performance and position of a business are measured at the end of the accounting periods. How long does an accounting period last?Generally, an accounting period lasts one year. Hence, an income statement shows the company’s financial performance over one year, while a balance sheet shows the financial position at the end of a year. What is the accounting period principle?The accounting period principle requires that such adjustments are made judicially and that an accounting record is created accordingly.  About the Author True Tamplin, BSc, CEPF®True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists. True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics. To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.
The period covered by a company's financial statements is known as an accounting period. The calendar year (January 1 to December 31) and the calendar quarter are common accounting periods for external financial reporting (January 1 through March 31, April 1 through June 30, July 1 through September 30, October 1 through December 31). Monthly accounting periods are also popular in these businesses. The financial statements for monthly accounting periods, on the other hand, are likely to be used only by the management of the companies. The objective of such a time period is to allow financial statements to be created and presented to investors, as well as to compare business performance over time. A corporation can assess the profit and loss that occurred within a specific time period by preparing financial statements for that time period. In the absence of a suitable accounting period, results will vary, making it difficult to identify the company's financial status at the moment. A 12-month accounting term is standard (1 year). While the time frame is set, the month can differ from one organisation to the next. Also Read | What is a Financial Statement? Requirements for Accounting Periods
Accounting periods are defined for the purpose of reporting and analysis. To begin with, accounting periods must be consistent. If an accountant prepares financial statements on a monthly basis, for example, they must do it for every month of the calendar year. This is known as periodicity, and it provides decision-makers, investors, and banks with a large, consistent sample size from which to make financial health and outlook decisions. In theory, an entity wants its growth to be consistent throughout accounting periods in order to show stability and a long-term profit projection. The accrual method of accounting is the accounting approach that supports this premise. The accrual method of accounting necessitates the creation of an accounting entry whenever an economic event occurs, regardless of when the monetary part of the event occurs. For example, the accrual method of accounting mandates that a fixed asset be depreciated throughout its useful life. Rather than a comprehensive reporting of expenses when the item was paid for, this identification of an expense over several accounting periods allows relative comparability over this period.
Another golden guideline to remember while using accounting periods is the matching concept. The matching principle is a fundamental accounting theory that governs the usage of accounting periods. It mandates that all expenses be recorded within the period in which they were incurred, and that all revenue be reported during the period in which it was obtained. According to the matching principle, expenses must be reported in the same accounting period that the item was incurred, as well as all corresponding revenue produced as a result of that spending. The time in which the cost of items sold is reported, for example, will be the same period in which the income for the same commodities is reported. According to the matching principle, financial data recorded in a single accounting period should be as full as feasible, and no financial data should be dispersed across numerous accounting periods. Also Read | What is Deferred Revenue? Examples and Importance Importance of an Accounting PeriodAccounting periods give business owners a long-term view of their company's profitability and assist them in making informed business decisions. The periodicity notion was invented by accountants to enable this. The continuing and complex operations of the firm are divided into short time periods and presented in monthly, quarterly, and yearly financial statements using this approach. The company generates and publishes financial accounts for each period. The financial statement's time period is indicated in the headline. For business owners, investors, creditors, and government authorities, this information is critical. The time period assumption provides stakeholders with accurate and timely financial data, allowing them to make informed business decisions. The accounting period chosen is determined by the needs and circumstances of the firm, which may be complicated enough to warrant various accounting periods. As long as legal requirements are met, all businesses are free to define as many periods as they choose. Financial Year vs. Accounting PeriodThe accounting period has no set length and can be any length, including one year or less, and possibly longer. It is divided into two types: calendar year and fiscal year. As a result, it can begin on any month's first day. A financial year, on the other hand, is the time that begins on January 1st and ends on December 31st of the following year (for example 1st April and ending on 31st March of next year). Thus, the financial year's total duration is one year, and the financial year's beginning and ending dates are fixed and cannot be changed, unlike the accounting period, which can be cut or extended from one year. Also Read | Time Value of Money: Concept, Formula and Benefits What are the Types of Accounting Periods?
An annual accounting period is a 12-month period in which business transactions are recorded. A short tax year, according to the Internal Revenue Service, does not classify as a yearly accounting period.
The accounting period is usually based on the Gregorian calendar year, which spans twelve months from January 1 to December 31. This natural sequence of months is followed by the accounting period. This accounting period lasts for the complete calendar year, beginning on January 1st. This means that a company can begin collecting accounting records as soon as the year begins and continue until the conclusion of the year. Different types of Yearly accounting periods
The fiscal year is a 12-month period that begins on January 1 and ends on December 31. The International Financial Reporting Standards (IFRS) permit an accounting term of 52 weeks. Many businesses use a 52-week or 53-week fiscal calendar for their financial tracking and reporting. The Internal Revenue Service (IRS) permits taxpayers to record their taxes using either the calendar or fiscal year. Businesses can select the time period in their fiscal year that they want to consider, giving them more time to plan their financial data collection approach. Accounting firms, seasonal enterprises, and corporations that generate revenue from events that occur at specified times of the year may employ a fiscal year accounting period. A company may, for example, pick a fiscal year that runs from February 1 to January 31 or follow a 52-53-week fiscal year, in which each year alternates between 52 and 53 weeks. If a company wants to choose its fiscal year for tax reporting, it can do so by filing its first income tax return for that year. If a company wishes to switch from a calendar to a fiscal year, it must obtain special clearance from the IRS.
The 4-4-5 calendar year divides the year into quarters and is commonly seen in retail. The name comes from the fact that each quarter consists of 13 weeks divided into two 4-week and one 5-week months. The key benefit of this period is that each period's end date always occurs on the same weekday. With as few different weekdays as feasible, periods can closely match the equivalent period of the preceding year. By allowing for four points throughout the year to prepare financial statements and concluding each period on the same day of the week to preserve consistency, a 4-4-5 calendar year accounting cycle can assist firms assess their financial data.
Internal reporting is usually done on a monthly basis in businesses. A monthly report gives a real-time picture of a company's financial health, including cash, assets, inventory, revenue, and orders.
An accounting period of a calendar month lasts four weeks and starts on the first day of the month a company wishes to evaluate. Businesses that wish to create financial statements rapidly and evaluate tiny chunks of data at a time may benefit from calendar month accounting periods.
During a company's fiscal year, a fiscal month accounting period can span four or five weeks. A corporation does not have to start on the first of the month because it can set its own fiscal month accounting period. A corporation can start on a given date and execute accounting operations for four or five weeks after that date to define a fiscal month accounting period, which means there is no mandatory start or end date for a fiscal month. Also Read | All About Monthly Recurring Revenue (MRR)
Three months is the length of a quarterly accounting period. The Securities and Exchange Commission has required publicly listed corporations to provide quarterly reports since 1970. (SEC).
A calendar quarter is a three-month accounting term that normally begins at the start of a fiscal quarter. Businesses can finish more than one calendar quarter in a calendar year because calendar quarters only last three months out of the year, giving them additional data to work with. They can also schedule their accounting periods to coincide with times when they want to examine their financial performance in light of specific events that may occur during that time.
A fiscal quarter is a 13-week accounting period based on a company's fiscal year rather than a calendar year. This means that a company might select a 13-week period to review and plan its accounting period to coincide with that timeframe. The 13 weeks following a certain start date are often used to gather and analyze financial data in fiscal quarter accounting periods. Also Read | Revenue and Turnover Advantages and Disadvantages of Accounting PeriodThe following are some of the advantages of Accounting Period users:
Disadvantages of Accounting Period
Also Read | What is Equity Investment? A corporation should choose its accounting period carefully and not modify it unless circumstances necessitate such a change. All accounting transactions linked to must be recorded at the same time, and mandatory accounting arrangements must be established wherever necessary to ensure that the matching principle is not broken. What is the purpose of dividing the life of the business into accounting periods?The life of a business is divided into specific time periods, usually, a year, to measure the results of operations for each such time period and to portray financial conditions at the end of each period.
Why is there a need to divide the indefinite period of operation of a business entity into calendar year or fiscal year?Consideration of seasonal profits
Using a different fiscal year than the calendar year lets seasonal businesses choose the start and end dates that better align with their revenue and expenses. This means a fiscal year can help present a more accurate picture of a company's financial performance.
What is the main purpose of the accounting function of a business?Accounting plays a vital role in running a business because it helps you track income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions.
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What is the purpose of dividing the life of the business in accounting periods?
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