Accounting Period: What is it and Why Is It Important?

Accounting Period is the time frame for which financial statements are prepared. This period may be a year, a quarter, or a month. The length of the period depends on the type of business. Generally, a shorter period is used for a more volatile business and a longer period is used for a more stable business.

The purpose of the accounting period is to provide a consistent basis for financial statement comparison. Financial statements that are prepared for different periods can be misleading because they may not be comparable. Accounting period is also used to track financial performance over time. This information can be used to make informed business decisions.

Some businesses use a fiscal year, which is a year that is not the same as the calendar year. A fiscal year is typically 12 or 13 months long and ends on the last day of the month that is designated as the fiscal year. The fiscal year is used to align the financial statements with the company’s annual budget and strategic plan.

Understanding the accounting period

An accounting period is a defined time span over which financial statements are prepared. The most common accounting periods are monthly, quarterly, and annual. Many businesses also use shorter or longer periods, such as weekly or semi-annually. An accounting period should be long enough to capture the major transactions that occur in the business, but not so long that it becomes burdensome to track and report on the transactions.

The decision of what an accounting period should be is based on a number of factors, including the type of business, the accounting system used, and the needs of the users of the financial statements. For most businesses, the accounting period is the same as the fiscal year, which is the 12-month period that the business uses to track its financial results.

An accounting period is important because it is the time frame over which financial statements are prepared. Financial statements show a company’s financial position and performance over a specific period of time. The most common financial statements are the balance sheet, the income statement, and the cash flow statement.

Businesses use financial statements to make important decisions, such as how much money to invest in the business, how much money to borrow, and how much money to pay out to shareholders. Financial statements are also used by lenders, investors, and other stakeholders to evaluate a company’s financial health and performance.

Types of accounting period

There are two types of accounting periods: calendar year and fiscal year. Calendar year accounting periods follow the Gregorian calendar, which has 12 months. Fiscal year accounting periods are based on the organization’s financial year, which may be different from the calendar year. For example, a fiscal year may be from July 1 to June 30.

Standards for Accounting Periods

The revenue recognition principle and the matching principle are the two fundamental accounting principles that control the use of accounting periods. These two tenets are covered by the accrual method of accounting.

The accrual accounting method

For the purpose of reporting and analysis, accounting periods are set up. Theoretically, a business aspires to grow consistently over the course of accounting periods in order to demonstrate stability and a view of long-term profitability. The accrual method of accounting is the one that backs up this theory.

Regardless of when the monetary component of an economic event occurs, the accrual method of accounting mandates that an accounting entry be made when the event takes place.

Revenue recognition principle

The revenue recognition principle is a key accounting principle utilized in the accrual method of accounting. According to the revenue recognition principle, revenue should be recorded as soon as it is earned rather than when money is transferred.

The bottomline

Whether an accounting period is monthly, quarterly, or by fiscal year, for example, a business performs, gathers, and evaluates accounting activities during that time. Potential investors can evaluate a company’s performance for investment purposes by looking at its financial statements, which are based on a specific accounting period. Analysts can also compare its financials to those of other companies within the same time period.