Accounting period, as a term, might not seem important at first, but it is influential indeed for accountants, investors, and management alike. For that reason, we compiled all the necessary information about the matter in this article—read on to see our simple accounting period explanation.
Accounting Period Explained
A predetermined window of time within which accounting operations are carried out gathered, and analyzed is known as an accounting period.
The length of an accounting period can be measured in weeks, months, quarters, fiscal years, or calendar years.
The accounting period is helpful while investing because those interested may assess a company's performance by looking at its financial statements, which are based on a set accounting period.
- An accounting period is a timeframe that is used to do certain accounting tasks; it might be a week, month, or quarter, for example, as well as a calendar or fiscal year.
- The accrual method of accounting enables consistent reporting since accounting periods are formed for reporting and analysis reasons.
- Revenue recognition and matching are two crucial principles that regulate accrual accounting.
- The revenue recognition concept asserts that rather than when cash is paid, income should be recorded when it is earned.
- According to the matching principle, a cost must be recorded during the same accounting period as the income it produced.
How Accounting Periods Operate
At any given moment, there are usually many active accounting periods. Consider, for instance, that the accounting division of XYZ Company is closing the books for the month of June.
Although the company may alternatively desire to sum up accounting data by quarter (April through June), half year (January through June), or a whole fiscal year, this specifies that the accounting period is the month (June).
Advantages Of Having Accounting Periods
Analysts and potential investors benefit from accounting periods because they may use them to spot trends in a single company's performance across time. The performance of two or more firms during the same time period may be compared using accounting periods as well.
Types of Accounting Periods
The first day of January is when an entity starts accumulating accounting records, and the last day of December is when the accumulating of data ends, according to a calendar year, in terms of accounting periods. This 12-month calendar cycle is mimicked by this yearly accounting period.
Another option for reporting financial information by a company is to utilize a fiscal year. Financial data is gathered for one year starting on the date that is arbitrarily chosen as the start of the accounting period for a fiscal year.
A fiscal year that began on April 1 would, for instance, terminate on March 31 of the following year. The fiscal year of the federal government is from October 1 to September 30, although the fiscal year of many nonprofit organizations is from July 1 to June 30.
The accounting period is stated in the headers of financial statements like the income statement and balance sheet.
The revenue and costs for a company's complete accounting period are shown on the income statement. With a phrase like:
"...for the year ended December 31, 20XX," the header will specify the time period in the heading.
The balance sheets, on the other hand, provide a picture of the assets, liabilities, and equity of a firm at a certain moment in time, meaning the end of the accounting period. The end day of the accounting period will be stated in the heading, for instance, "as of June 30, 20XX."
Read more about Accounting Cycle Steps.
Rules And Prerequisites For Accounting Periods
The matching principle and the revenue recognition principle are the two fundamental accounting principles that control the usage of accounting periods.
These two tenets are covered by the accrual approach of accounting.
- Accrual Accounting In Terms Of Accounting Periods
Reporting and analysis are the two main reasons why accounting periods are set up. Theoretically, a corporation aspires to expand consistently over the course of accounting periods in order to demonstrate stability and a view of long-term profitability.
The accrual technique of accounting is the one that backs up this idea. Regardless of when the monetary component of an economic event happens, the accrual method of accounting mandates that an accounting entry is made when the event takes place.
For instance, the accrual method of accounting mandates that fixed assets be depreciated over the course of their useful lives. As opposed to recording a whole expenditure at the time the item was purchased, expenses are recognized across a number of accounting periods, allowing for relative comparability between them.
- Principle Of Revenue Recognition
The revenue recognition principle is a key accounting theory utilized in the accrual method of accounting.
According to the revenue recognition principle, income should be recorded as soon as it is earned rather than when money is transferred.
A business may generate income even before receiving payment, for instance, if it permits clients to purchase items on credit. The business will record revenue and accounts receivable at the time of service or when transferring an item to the consumer.
A firm must set up a deferred revenue account to show that revenue hasn't been made if it doesn't have any when payment is received.
The matching principle is a fundamental accounting theory that pertains to the usage of an accounting period. According to the matching principle, costs must be recorded within the same accounting period as the related revenue.
For instance, the time frame for which the cost of goods sold (COGS) is recorded will coincide with the time frame for which the revenue for the same commodities is reported.
The depreciation and consequent spreading of expenses across several periods, using the depreciation example from earlier, better align the usage of fixed assets with its capacity to produce income.
A business would still have plenty of time to produce profits even if it expensed a costly machine in the year of acquisition.
The revenue and expenditure would not line up in such a case. The expenditure is better matched to the relevant revenue by being spread out across the fixed asset's useful life.
Read more in detail about Accrual vs. Cash Basis Accounting.
Is A 12-month Accounting Period A Legal Requirement?
No, any predetermined time frame within which a business chooses to evaluate its performance qualifies as an accounting period.
A weekly, monthly, quarterly, or yearly schedule is possible.
What Kind Of Accounting Periods Are There?
The standard year that everyone is used to is a calendar year.
From January 1 to December 31, it is in effect. On the other hand, a firm may choose any yearly period for its fiscal year.
What Happens When An Accounting Period Ends?
A business will close out the period at the conclusion of an accounting period. The business will be prepared to generate its financial reports for that accounting period after all closing entries have been done.
A period may be closed out days, weeks, or even months into the following accounting period, and two periods may be active at the same time.
Whether an accounting period is monthly, quarterly, or by fiscal year, for example, a corporation performs, gathers, and evaluates accounting activities throughout 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 their financials to those of other firms within the same time period.
To learn more about financial statements and accounting in general, check out one of our related articles now—see you there!
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