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Accounting Period Concept – Commerce And Accountancy Notes – For W.B.C.S. Examination.
An accounting period is the span of time covered by a set of financial statements. This period defines the time range over which business transactions are accumulated into financial statements, and is needed by investors so that they can compare the results of successive time periods.Continue Reading Accounting Period Concept – Commerce And Accountancy Notes – For W.B.C.S. Examination.
For internal financial reporting, an accounting period is generally considered to be one month. A few firms compile financial information in four-week increments, so that they have 13 accounting periods per year. Whatever accounting period is used should be applied consistently over time.
If a set of financial statements cover the results of an entire year, then the accounting period is one year. If the accounting period is for a twelve month period ending on a date other than December 31, then the accounting period is called a fiscal year, as opposed to a calendar year. For example, a fiscal year ended June 30 spans the period from July 1 of the preceding year to June 30 of the current year. Ideally, the fiscal year should end on a date when business activity is at a low point, so that there are fewer assets and liabilities to audit.
Yet another variation on the accounting period is when a business has just been started, so that its first accounting period may only span a few days. For example, if a business begins on January 17, its first monthly accounting period will only cover the period from January 17 to January 31. The same concept applies to a business that has been terminated. For example, if a business were to be shut down on January 10, its final monthly accounting period would only cover the period from January 1 to January 10.
Public Company Accounting Periods
A publicly-held company must report to the Securities and Exchange Commission on a quarterly basis, so the accounting period for its financial reports to the SEC span three months.
This concept helps in estimating the profit or loss and financial position of a business for a particular
period. If there are different accounting periods then various problems can arise like in the calculation of profits, comparability of various incomes & expenses etc. Thus to study the results of a business, the life of a business is divided into short periods of equal length. 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 information is needed by all concerned on a regular basis and should, therefore, be prepared on an ongoing basis. For the purpose of having a reliable and comparable set of financial statements, the performance and position of a business is measured at the end of predetermined periods called accounting periods.
Generally, an accounting period is one year. Hence, an income statement shows the financial performance over one year while a balance sheet shows the financial position at the end of a year. This year may not necessarily be a calendar year. It may run from January to December, or from July of one year to June of the next, or from October to September.
The fact that financial statements are prepared in relation to an accounting period necessitates certain adjustments. For example, when a car is bought its cost must be apportioned over the various accounting periods in which the said will be used. The accounting period principle requires that such adjustments be judicially made and accounting record of them made accordingly.
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