Money is constantly flowing in and out of a business, so how do you track performance over time? The accounting period concept gives organisations a way to aggregate and analyse their financial data over a fixed period.
What is the accounting period concept?
An accounting period is used for recording and analysis purposes. It’s an established timeframe during which accounting functions are measured. A calendar or fiscal year is often used as an accounting period, but businesses might choose shorter periods of a quarter, a month, or even a week.
The purpose of setting this standard is to give a framework for financial statements. Shareholders and investors can analyse the company’s performance from one accounting period to the next. It makes it easier to track changes, including profit and loss.
The accounting period only needs to apply to a business’s statement of cash flows and income statements. The balance sheet already reports information from a specific date, covering a specific period of time. For example, if a company is reporting its results for the month of March, the income statement would say ‘for the month ended March 31’ while the balance sheet would state ‘as of March 31.’
What are the types of accounting periods?
With the way that financial data is processed, it’s possible for multiple accounting periods to be active at once. For example, a business might look at an accounting time period for the current month, but also aggregate data for the quarter and fiscal year.
Here are some of the different accounting time periods that might be used:
Fiscal year: Although many businesses start and end their fiscal years according to government tax dates, in reality, the fiscal year is whatever you want it to be. You could choose any arbitrary date to begin your company’s fiscal year, marking the start of the accounting period. For example, a fiscal year starting on May 1 would end on April 30 the following year.
Calendar year: As the name suggests, a calendar year begins and ends according to the traditional twelve-month calendar period. The company should start aggregating its accounting records on the first day in January, finishing the period on the last day of December.
Monthly accounting period: Many entities choose to follow a monthly accounting period schedule, aggregating accounting records afresh on the first of each month. Some even decide to break it down by week, which is helpful when there are large fluctuations or rapid periods of growth.
What are the accounting period requirements?
Whether you opt for a quarterly, annual, or monthly accounting period, make sure it’s consistent. The primary purpose of the accounting period concept is to streamline reporting and analysis. Businesses who wish to display consistency and stability in their growth over the long term can verify this with a consistent accounting period.
The accrual method of accounting is one way to ensure consistency across accounting periods. This requires accounting entries to be made as they happen, making it easier to compare cash flow, profit, and losses over time.
Another rule to keep in mind when setting up accounting periods is the matching principle. This method requires expenses to be reported in the same accounting period that the expense was incurred. Along with the expense, any resulting revenue that occurred as a direct result of the expense should also be reported in the same period. For example, you would enter the cost of goods sold in the same accounting period as the revenue received from the sale of these goods.
By using consistency and the matching principle, financial data is kept balanced and complete within each accounting period. This gives a clearer picture to all stakeholders in the business.
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