The Accounting Period Concept: Explained

An accounting period is defined as the established time period during which the accounting functions are performed. The functions are aggregated and analyzed in the same calendar or the fiscal year. 

The calculation of the accounting period is important as this forms the base for the investors to invest in a particular business. The concept is necessary as this will help the investors to analyze the financial performance of the business based on the financial report of a fixed accounting period.

An accounting period is rightly known as the time frame. In this time frame, a business prepares its own financial statements and reports the financial performance and position of its business to the external or the interested stakeholders. 

The accounting Period is generally after every three, six, or twelve months. The accounting period maximum times coincides with the business's fiscal year. There are other business entities that follow the accounting period of three or six months.

In the internal system, the accounting period is considered to be a month or for a quarter while externally the accounting period is for a period of twelve months. The International Financial Reporting Standards (IFRS) allows a 52-week period which is known as the fiscal year, instead of a full year, as the accounting period.

What are the Types of Accounting Period?

Calendar Year

Generally, the accounting period follows this Gregorian calendar year which consists of twelve months. The month starts from January 1 to December 31. The accounting period follows this natural sequence of these 12 months.

Fiscal Year

The fiscal year is an annual period that does not end on December 31. The International Financial Reporting Standards (IFRS) generally allows 52 weeks as the accounting period. There are companies that follow the 52 or 53 weeks fiscal calendar that help with financial tracking and reporting.

The Internal Revenue Service (IRS) allows the taxpayers to either use the calendar year or the fiscal year for reporting their tax.

If a business wants to change from a calendar year to a fiscal year, they need to be permitted by the IRS.

4–4–5 Calendar Year

This is the most common calendar structure for especially in the retail and manufacturing industries. In the 4–4–5 calendar, a particular year is divided into 4 quarters. With each quarter having thirteen weeks that are grouped into one 5-week month and the other two 4-week months.

This information is quite important for business owners, investors, creditors and government agencies. The time period assumption provides the stakeholders with reliable and relevant financial information to make their reliable business decisions in a timely manner.

The choice of this accounting period depends on the business requirements and circumstances that might be complex to warrant other accounting periods. Hence, all businesses are allowed to define as many periods as they require as long as they meet the legal requirements.

What is the Accounting Period Concept?

The corporation compiles and arranges its financial activity during the accounting period. At the end of the accounting period, the accounting cycle is used to compile financial statements. The accounting period is the length of time it takes for a business's accounting cycle to be completed. Because the accounting cycle captures all transactions across time and reports them in the form of financials, one accounting cycle equals one accounting period. The cycle starts with the financial books at the start of each financial period with reversing entries and ends with year-end closing entries at the end of that period. Businesses must prepare financial statements before the start of the next accounting period to complete this cycle.

What is the Significance of an Accounting Period?

The accounting period allows the business owner to see the business from a different perspective. Their continued profitability and other business decisions keep them informed. Firms use the concept of periodicity to do this. For business owners, investors, creditors,and government authorities, this information is critical. 

The period assumption allows stakeholders to make timely business decisions by providing them with reliable and relevant financial data. This accounting period is chosen based on the business needs and conditions, which may be too complicated to warrant other accounting periods. As a result, all businesses are free to define as many periods as they need as long as they comply with the law.

Advantages

The following are some of the advantages and benefits to financial statement users: It can be used to show a company's financial situation over a set period. It can be used to compare financial data from two or more periods. This approach aids the organization in establishing a formal period during which the books must be closed. The notion is important for investors because it allows them to compare the trends of financial results over time.

Disadvantages

If the matching principle is not followed, it may not be useful. When comparing outcomes from one period to the next, the factual causes for the differences are ignored. If the tax period is different, two separate accounts must be kept.