Accounting Year and Its Importance

An accounting year is a period of annual financial reporting in which a company arranges its financial information. It is beneficial for running a business and its management. Potential shareholders identify the performance of the company through its financial statements. It is therefore important to keep the financial records understandable and prepare them accurately on regular basis.

Meaning of Accounting Year

An accounting year is a period for which a business makes its financial statements and reports its financial performance and financial position to external stakeholders. The accounting periods could be after three, six, or twelve months as per the needs of the management.

The accounting period usually corresponds with the fiscal year of the business. However, many business entities follow the accounting period of three months or six months. Internally, the accounting period is measured to be a month or a quarter while externally it is for a year. The International Financial Reporting Standards (IFRS) permits a fiscal year of 52 weeks, instead of a full year, as the accounting period.

Importance of Accounting Year 

The accounting year allows the owners of the business with a viewpoint about the profitability of the business continuity and supports them to make reliable business decisions. To ensure this, the concept of periodicity has been introduced by the accountants. The continuous and complex events of the business are segregated into short tenures and reported in monthly, quarterly, and annual financial statements of the business under the concept of periodicity. For every period, the business prepares and issues financial statements. The period of the financial statement is shown in its heading as it is important to know the period for which reports are prepared. 

This data is important for the users of the business information like the owners, investors, creditors, and government agencies. The period hypothesis offers the stakeholders dependable and related financial information to make accurate and trustworthy business decisions on time. The choice of the accounting period is based on the needs and circumstances of the business which might be sufficiently critical to permit different accounting periods. All businesses are permitted to use as many periods as per their needs as long as they meet legal requirements.

Accounting Year Cycle

The accounting cycle is the procedure of accepting, recording, arranging, and crediting payments made and received within a business during a specific accounting period. Companies generally tally their books of accounts each quarter and then again at year-end, though others may choose to settle the books daily or weekly. It involves a lot of work to tally the books daily or weekly but it can be done if the management desires to.

Based on transactions recorded as a portion of the accounting cycle, financial statements such as cash flow reports, profit and loss statements, and balance sheets can be made. When all the business accounts have been balanced, they are closed for that period and new ones are prepared for the next accounting period.

Steps of Accounting Cycle

The eight steps of the accounting cycle are important to know for all types of bookkeepers. It cuts down the entire process of the responsibilities of a bookkeeper into eight simple steps. With the help of accounting software technology programs, most of these steps are nowadays generally automated.

Transactions: The process of the accounting cycle starts with financial transactions. Monetary events are known as transactions. If there are no financial transactions, the business will have nothing to keep a record of. Transactions may include a payment of the debt, any purchase or acquisition of assets, sales revenue, or any expenses incurred.

Journal Entries: When the transactions are identified and set, the next step is to record these entries in the journal book of the company in chronological order. Following the double-entry system of bookkeeping, while debiting one or more accounts and crediting one or more accounts, the debits and credits must always tally.

Posting to General Ledger: After the recording of the journal entries, these entries are then posted to the general ledger where a brief of all transactions to individual accounts can be noticed.

Trial Balance: At the end of the accounting period which may be quarterly, monthly, or yearly, based on the decision of the company, a total balance is considered for the accounts.

Worksheet: When the debits and credits on the trial balance do not tally with each other, the bookkeeper must look for mistakes and make necessary changes that are recorded on a worksheet.

Adjusting Entries: At the end of the accounting period of the company, adjusting entries must be posted to respective accounts for the recording of accruals and deferrals.

Financial Statements: The balance sheet, income statement, and cash flow statement can be made using the correct balances posted in the individual accounts.

Closing: The income and expense accounts are tallied and closed for the next accounting cycle. This is due to revenue and expense accounts being recorded in the Statement of Profit or Loss, which represent performance for a particular period. Balance sheet accounts are not closed because they represent the financial position of the company at a fixed point in time.

Financial Reporting 

Financial reporting is the process of recording and translating financial activities and performance over particular periods, normally on a quarterly or yearly basis. Financial reports are used by the companies to arrange accounting data and report on the present financial status of the company. Financial reports are also important in the forecasts of future effectiveness, the position of industry, and growth. Many financial reports are also made available for public review.

Types of Financial Reports

Balance Sheet

It is a financial statement that reports on the financial position of a company including the assets, liabilities, and equity of the owners at a point in time.

Profit and Loss Report 

It is also known as a P&L Report or Income Statement. It is the financial statement that reports on the expenses, revenue, net loss, or profit of the company over a particular period.

Cash Flow Statement

This is a statement showing cash flow activities of the company consisting of the operating, investing, and financing transactions of the business in cash. The statement particularly reports on the cash generated and cash expended over a certain period.

Statement of Changes in Equity

This financial statement reports on the changes in retained earnings of the company after dividends are paid to stockholders. It is an important part of financial reporting which helps in identifying the stock price.

Importance of Financial Reporting

Financial Reporting helps an organization to justify various laws and regulatory requirements. The organizations are required to report their financial statements to the Registrar of Companies, Agencies of the Government. In the case of listed companies, quarterly as well as annual reports are required to be filed and published to stock exchanges.

Financial Reporting also facilitates statutory audits of the company. The Statutory auditors are required to review the financial statements of an organization to express their opinion on the reports.

Financial Reports form the basis for financial planning, analysis, benchmarking, and decision-making for the users and the management of the company. Financial Reports provide the stakeholders with reliable information to make appropriate decisions.

Conclusion

An accounting year is a period for which a business makes its financial statements and reports its financial performance and financial position to external stakeholders. The International Financial Reporting Standards (IFRS) permits a fiscal year of 52 weeks, instead of a full year, as the accounting period. The accounting year allows the owners of the business with a viewpoint about the profitability of the business continuity and supports them to make reliable business decisions. To ensure this, the concept of periodicity has been introduced by the accountants. The accounting cycle is the procedure of accepting, recording, arranging, and crediting payments made and received within a business during a specific accounting period.