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What is Accounting Period Concept? Full Explanation with Example

  November 1, 2022

So for every debit, the matching debit should be recorded in the same accounting time period. So, the accounting time period should be defined clearly to adhere to this principle. A corporation should choose its accounting period carefully and not modify it unless circumstances necessitate such a change. Internal reporting is usually done on a monthly basis in businesses. A monthly report gives a real-time picture of a company’s financial health, including cash, assets, inventory, revenue, and orders.

account period concept

At the end of the said period, the organizations will present its financial statements also known as financial reporting. Financial accounting refers to collecting, summarizing and presentation of the financial information resulting from business transactions. It reports the operating profit and the value of the business to the stakeholders. In other words, financial accounting is used for reporting financial transactions to the stakeholders in a format that is acceptable and adaptable by all businesses.

What is the Significance of an Accounting Period?

The real explanations for the observed disparities between the periods are not taken into account when comparing two financial periods. If the matching principle is not followed, it may prove to be fruitless. It mandates that all expenses be recorded within the period in which they were incurred, and that all revenue be reported during the period in which it was obtained. The accrual method of accounting necessitates the creation of an accounting entry whenever an economic event occurs, regardless of when the monetary part of the event occurs. This is known as periodicity, and it provides decision-makers, investors, and banks with a large, consistent sample size from which to make financial health and outlook decisions.

account period concept

The matching principle is a fundamental accounting theory that governs the usage of accounting periods. In theory, an entity wants its growth to be consistent throughout accounting periods in order to show stability and a long-term profit projection. The accrual method of accounting is the accounting approach that supports this premise. The objective of such a time period is to allow financial statements to be created and presented to investors, as well as to compare business performance over time. The fiscal year is an annual period that does not end on December 31. The International Financial Reporting Standards generally allows 52 weeks as the accounting period.

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. The Internal Revenue Service allows the taxpayers to either use the calendar year or the fiscal year for reporting their tax. 2.Comparison of two financial periods does not take into account the factual reasons that are behind the observed differences between the periods.

Disadvantages of Accounting period concept

This is the most widely used calendar structure, particularly in the retail and manufacturing industries. A year is divided into four halves in the 4–4–5 calendar, and each quarter consists of thirteen weeks divided into one five-week month and two four-week months. Some companies may use the regular calendar year as their fiscal year, while others may use the fiscal period . L It also helps banks, financial institutions, creditors, etc to assess and analyse the performance of business for a particular period.

What are the 7 principles of accounting?

  • Consistency Principle:
  • Going Concern Principle:
  • Accrual Principle:
  • Conservatism Principle:
  • Objectivity Principle:
  • Matching Principle:
  • Full Disclosure Principle:

Hence, all businesses are allowed to define as many periods as they require as long as they meet the legal requirements. The income statement records the revenue and expenses for the financial period. It records all the revenue earned and expenses incurred for that period. It shows the operating wellness of the organization; this statement also provides the necessary information for tax computation. A revenue must be recorded only when it is reasonably certain that it will be realized in the near future. The heart of financial accounting is the Double entry system of bookkeeping.

Importance of an Accounting Period

Each such period is known as accounting period.While true profit or loss of a business can only be determined when the business finally closes down, it would be unwise to wait for that. Accounting account period concept information is needed by all concerned on a regular basis and should, therefore, be prepared on an ongoing basis. We often look at the financial accounting reports of companies and businesses.

  • If the matching principle is not followed, it may not be useful.
  • You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources.
  • Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.
  • All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period.

Year that begins from 1st of January and ends on 31st of December, is known as Calendar Year. The year that begins from 1st of April and ends on 31st of March of the following year, is known as financial year. The key benefit of this period is that each period’s end date always occurs on the same weekday. With as few different weekdays as feasible, periods can closely match the equivalent period of the preceding year.

Economic entity concept

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In addition to business managers, financial statements are also of interest to investors, creditors, and government agencies to whom they are submitted. Most people evaluating a company will do so by studying the financial statements over a few accounting periods. The 13 weeks following a certain start date are often used to gather and analyze financial data in fiscal quarter accounting periods. For business owners, investors, creditors, and government authorities, this information is critical.

Revision Notes

During a company’s fiscal year, a fiscal month accounting period can span four or five weeks. A corporation does not have to start on the first of the month because it can set its own fiscal month accounting period. An annual accounting period is a 12-month period in which business transactions are recorded. A short tax year, according to the Internal Revenue Service, does not classify as a yearly accounting period. Another golden guideline to remember while using accounting periods is the matching concept.

What are the 12 principles of accounting?

  • Accrual principle.
  • Conservatism principle.
  • Consistency principle.
  • Cost principle.
  • Economic entity principle.
  • Full disclosure principle.
  • Going concern principle.
  • Matching principle.

The company generates and publishes financial accounts for each period. The financial statement’s time period is indicated in the headline. Monthly accounting periods are also popular in these businesses. The financial statements for monthly accounting periods, on the other hand, are likely to be used only by the management of the companies. These reports are essential to understand the company’s finances.

What are the advantages of accounting period concept?

It helps portray the company's financial status for a set time. It helps compare financial data from two or more periods. This concept helps companies set formal closing periods. This term is essential to investors because it allows them to compare trends in financial results over time.

While some companies may use the calendar year for internal purposes, the fiscal year generally starts on the 1st of April. So an annual report would usually span the period of 1st April of a year to the 31st March of the subsequent year. You can compare the business reports of two equal sections of time to compare the company’s performance in other financial aspects. The most commonly generated statements for a time period are the income statement and the balance sheet. The income statement indicates how profitably the company has operated, and the balance sheet gives an overall picture at the end of the financial period.

This statement shows the changes in shareholders equity for the accounting period. Accounting is a vast function, it varies depending on the purpose it is used for. Financial accounting is used for business analysis, by parties external to the organization. The revenue and expenses are accounted for in the income statement and the asset, liabilities, and equity are reported https://1investing.in/ for in the balance sheet. The standards issued by the various boards, not only assist an organization in reporting the transactions correctly but also give clarifications for complex transactions faced by businesses. The choice of this accounting period depends on the business requirements and circumstances that might be complex to warrant other accounting periods.

Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Regardless of when the monetary portion of an economic transaction happens, the accrual method of accounting requires an accounting entry to be made. S are used to report and analyse data, and accrual accounting methods ensure consistency. Accounting firms, seasonal enterprises, and corporations that generate revenue from events that occur at specified times of the year may employ a fiscal year accounting period. The financial statements report on five main aspects of a business.