Accounting Period Concept

What is the Accounting Period Concept?

An accounting period might be a week, a month, a quarter, or any other unit of time that encompasses specific accounting activities. It is possible to record financial information over a long period using the accrual method of accounting. 

Generally speaking, an accounting period is a predetermined period of the accounting activities, data is accumulated, and analysis is undertaken, such as a calendar year or fiscal year, among other things. 

Accounting Period Meaning

• It is possible to understand an accounting period as the time it takes to complete one accounting cycle

• When it comes to accounting, one period is equal to one cycle because it aims to record transactions across time and report them in financial terms

• The accounting cycle opens and closes the books at the beginning and end of each period, with reversing entries

• After that, the financial statements are prepared, and the new accounting period runs

How do the Accounting Period Concept Work?

• It is necessary to use the accounting period to analyse and compare financial data from the company over two years

• When two separate periods are compared, it is possible to study several financial criteria that indicate the growth or decline of the organisation

• It acts as a reference to a report of this nature and is quite beneficial to the stakeholders

Accounting Period Types 

There are two categories of the accounting period:

• Fiscal year: For businesses that operate on a fiscal year, the first day of any month other than January marks the beginning of the fiscal year

• Calendar year: For businesses that operate on a calendar year, the year begins on the first of January and concludes on the last day of December of the same year

Importance of the Accounting Period Concept 

• Regular intervals for recording accounting transactions and compiling results are essential for determining an organisation’s financial results

• The company’s financial results will be reflected in the outcomes of each interval

• As a result, a side-by-by-side comparison is limited to the accounting period. It can be used if a company’s losses or earnings aren’t measured over a specific period

• Thus, the idea offers context to financial reports and aids investors in making sound financial decisions

The Difference between an Accounting Period and a Financial Year

• The accounting period is not defined in length; it can be any length, from one year to more than one year

• It is classified into two types: calendar year and fiscal year. As such, it may begin on any month’s first day

• However, the term “financial year” refers to the period beginning with the start of a full year

• Thus, the financial year’s entire duration is one year, and its beginning and end dates are fixed and cannot be changed, in contrast to the accounting period, which can be cut or extended from one year.

Accounting Period Concept Examples:

Example A:

Every year, from the first of January to the last day of December, a company’s transactions are recorded, and its financials are closed. The accounting period, in this case, is one year, from the first of January to the last day of December.

However, not all businesses are required to adhere to the one-year rule.

Example B:

Every year, from the first of January to the last day of June, a company’s transactions are recorded, and the company’s books of accounts are closed. The accounting period, in this case, is a half-year, i.e., from the first of January to the last day of June, and the following period will be from the first of July to the last day of December.

Conclusion 

An accounting period can be defined as the length of time it takes to complete one accounting cycle. A cycle is used and presented in financial terms to keep track of transactions throughout time. Therefore, one period is equivalent to one cycle is only logical. 

Financial statements are prepared a few days later, and the next accounting period is initiated. The accounting period is essential in investment because potential shareholders can evaluate a company’s performance by examining its financial statements, which are prepared based on a specified accounting period, before investing.