Accounting Period (Definition, Types)

Accounting Period Definition

Accounting Period refers to the fixed time period during which all accounting transactions are recorded for and financial statements are compiled to be presented to the investors, so that they can track and compare the overall performance of the company for each time period.

Types of Accounting Period

They are of two types –

Calendar Year: For those companies which follow calendar year, it starts from 1^st January and ends on 31^st December of the same year.
Fiscal Year: For those companies which follow the fiscal year, it starts from the first day of any month other than January.

How does it Work?

Accounting period serves the purpose of analysis and comparison of the financial data of the company for two different periods. When two different periods are referred to analysis can be made regarding various financial parameters that suggest the growth or the downfall of the company. It serves as a reference to such analysis and is very useful for the stakeholders.

Examples of Accounting Period Concept

Example #1

A company record their transactions from 1^st January to 31^st December every year and close their financials after that. Here, the accounting period is of one-year i.e. 1^stJanuary to 31^st December.

However, it is not necessary that all companies follow a period of one year.

Example #2

A company record their transactions from 1^st January to 30th June every year and close their books of accounts after that. Here, the accounting period is that of half-year i.e. 1^st January to 30^th June and next period shall be from 1^st July to 31^st December.

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Advantages

The following are advantages and benefits to the users of the financial statements:

It is useful in representing the financial position of the company for a fixed interval.
It is useful in comparison of financial data of two or more periods.
This concept helps the company in setting a formal period over which books are required to be closed.
The concept is useful for investors as they can refer to the trends of the financial results over a number of intervals.

Disadvantages

It may not be useful if the concept of matching principle is not followed.
Comparing the results of one period to another does not take into account the factual reasons that led to the differences.
If the tax period is different, then two separate accounts will be required to be maintained.

Importance

In order to ascertain the financial results of the company, it is very important to fix regular intervals for which accounting transactions shall be recorded and results shall be compiled. The results of each interval will represent the financial result of the company in each such interval. Thus, one by one comparison is possible only in respect of the accounting period. Whether a company has incurred losses or profits is a vague question if any fixed interval is not allotted to it. Thus, the concept gives meaning to financial statements and help the investors in a proper analysis of financial results.

Accounting Period vs Financial Year

Accounting period has no fixed length and it can be of any length such as one year or less and maybe more than one year. It has two types namely calendar year and fiscal year. Accordingly, it can start from the first date of any month.

However, a financial year refers to the period starting of one full year (for example 1^st April and ending on 31^st March of next year). Thus, the total duration of the financial year is one year and the starting and ending of financial is fixed and cannot be changed, unlike the accounting period where the period can be shortened or extended from one year.

Conclusion

A company shall choose its accounting period wisely and not change it unless the conditions arise such that such change becomes necessary. All the accounting transactions relating to shall be recorded in the same period and whenever required, necessary accounting provisions shall be made so that matching principle is not violated.