What Is Accounting Period?
The accounting Period refers to the fixed period during which all accounting transactions are recorded, and financial statements are compiled to be presented to the investors to track and compare the company’s overall performance for each period. A company shall choose its accounting period wisely and not change it unless the conditions arise such that such change becomes necessary.
The accounting period principle allows companies to follow a weekly, monthly, quarterly, or annual form of bookkeeping. Monthly accounting periods are the most common forms of accounting for firms as it gives them enough data to compare their growth trajectory, sales, inflows, and outflows in detail. However, the beginning of an accounting period can depend on the jurisdiction of the business.
Table of contents
- The term “accounting period” refers to the predetermined time frame during which all accounting transactions are documented, and financial statements are collected to be presented to investors.
- Establishing “regular intervals” for recording accounting transactions and compiling results is essential to determine the company’s financial results. Each interval’s results will reflect the company’s financial performance for that specific interval.
- A financial year begins with a full year (for example, the 1st of April and ends on the 31st of March of the next year). Consequently, the financial year is one year long overall.
- Its related accounting transactions must all be recorded during the same time frame. Obligatory accounting provisions must be created to ensure that the matching principle is upheld.
How Accounting Period Work?
The accounting period concept 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 company’s growth or downfall. Therefore, it serves as a reference to such a report and is very useful for the stakeholders.
Therefore, all the accounting transactions relating to it shall be recorded in the same period. Requiring, 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.
Different periods imply different accounting period costs. Let us understand its different types through the discussion below.
- Calendar Year: For those companies which follow the calendar year, it starts on 1st January and ends on 31st December of the same year.
- Fiscal Year: For those companies which follow the fiscal yearFiscal YearFiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th September, it starts from the first day of any month other than January.
Let us understand the accounting period concept in detail through the examples discussed below.
A company records its transactions from 1st January to 31st December every year and closes its financials. Here, the accounting period is one year, i.e., 1st January to 31st December.
However, not all companies need to follow one year.
A company records its transactions from 1st January to 30th June every year and closes its 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 accounting period costs depend on the time frame the company chooses to inculcate. Nevertheless, these costs are almost never given second thoughts as they bring more clarity and definitive data points. Let us understand its importance through the explanation below.
For the company’s financial results 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 company’s financial result in each such interval. Thus, the one-by-one comparison is possible only regarding the accounting period. Whether a company has incurred losses or profits is a vague question if any fixed interval is not allotted. Thus, the concept gives meaning to financial statements and helps the investors properly analyze financial results.
Advantages & Disadvantages
Let us understand the advantages and disadvantages of the accounting period principle through the discussion of points from both extremes of this concept.
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 company’s financial position for a fixed interval.
- It is useful in comparison of financial data of two or more periods.
- This concept helps the company set a formal period over which books must 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 the matching principle is not followed.
- Comparing the results of one period to another does not consider the factual reasons that led to the differences.
- If the tax period is different, two separate accounts will be required to be maintained.
Accounting Period vs. Financial Year
For individuals new to the business world, accounting period concept and financial year often sound like the exact same phenomenon. However, there are differences that have been highlighted through the comparison below.
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 end of the financial year are fixed and cannot be changed, unlike the accounting period where the period can be shortened or extended from one year.
Frequently Asked Questions (FAQs)
The government and enterprises utilize a fiscal year (FY), usually a budget year, as the time frame for accounting to create annual financial accounts and reports.
Five key concepts underlie accounting procedures and the creation of financial statements, even though there are many rules for accountants. The accrual principle, matching principle, historic cost principle, conservative principle, and the principle of substance over form are those.
A profit and loss statement is a type of financial report that details how much your company has made and spent over a certain period. The term comes from the fact that it also displays if you made a profit or loss during that time.
This has been a guide to what is Accounting Period. Here we explain its types, examples, importance, advantages, and disadvantages. You can learn more from the following articles –