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.
Accounting Period – A Time Frame
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’ 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 is the Accounting Period Cycle Concept?
While in the accounting period, the company gathers and organizes its financial activity. The accounting cycle is used to create financial statements at the close of the accounting period.
The accounting period is to be considered the time taken to complete an accounting cycle of the business. As the accounting cycle records all the transactions over a period of time, this reports them in the form of financials, which means one accounting cycle equals one accounting period.
The cycle begins with the financial books at the beginning of each financial period with the reversing entries and closes the books at the end of such a period with year-end closing entries. To complete this cycle, the businesses must prepare the financial statements before the beginning of the next accounting period.
What are the Types of Accounting Period?
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.
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.
Why is an Accounting Period Important?
The accounting period provides the business owners insight into the perspective of the business. Their ongoing profitability, other business decisions help them to remain informed. To enable this, firms follow the concept of periodicity.
With this concept, the ongoing and complex undertakings of the business are divided into short time periods which can be reported monthly, quarterly, and annual financial statements. For every time period, the business prepares and also publishes the financial statements. The time period of the financial statement is represented in its heading.
This information is quite important for the business owners, investors, creditors and government agencies. The time period assumption provides the stakeholders with reliable and with 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.