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 the calendar year, it starts from 1st January and ends on 31st 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?
The 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 a report and is very useful for the stakeholders.
Examples of Accounting Period Concept
A company record their transactions from 1st January to 31st December every year and close their financials after that. Here, the accounting period is of one year, i.e., 1st January to 31st December.
However, not all companies need to follow one year.
A company record their transactions from 1st 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., 1st January to 30th June and the next period shall be from 1st July to 31st December.
The following are advantages and benefits to the users of the financial statementsUsers Of The Financial StatementsFinancial statements prepared by the Companies are used by different categories of individuals and corporates on the basis of their relevancy to the respective parties. The most common users to the financial statements are Management of the Company, Investors, Customers, Competitors, Government and Government Agencies, Employees, Investment Analysts, Lenders, Rating Agency and Suppliers.:
- 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 several intervals.
- 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.
For the financial results of the company to be ascertained, it is crucial to fix “regular intervals” for which accounting transactionsAccounting TransactionsAccounting Transactions are business activities which have a direct monetary effect on the finances of a Company. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. 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
The 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 1st April and ending on 31st 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.
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, mandatory accounting provisionsAccounting ProvisionsThe provision in accounting refers to an amount or obligation set aside by the business for present and future commitments. Provisions are estimates of future related probable losses from past and present events calculated by following predefined regulatory guidelines by banks and financial institutions. shall be made so that the matching principleMatching PrincipleThe Matching Principle of Accounting provides accounting guidance, stating that all expenses should be recognized in the income statement of the period in which the revenue related to that expense is earned. This means that, regardless of when the actual transaction is made, the expenses that are entered into the debit side of the accounts should have a corresponding credit entry in the same period. is not violated.
This has been a guide to Accounting Period and its definition. Here we discuss the concept of accounting period along with its types, how does it work, along with examples, advantages, disadvantages, and differences with the financial year. You can learn more from the following articles –