What is an Accounting Period? Meaning and Types

The period covered by a company's financial statements is known as an accounting period. The calendar year (January 1 to December 31) and the calendar quarter are common accounting periods for external financial reporting (January 1 through March 31, April 1 through June 30, July 1 through September 30, October 1 through December 31). 

 

Monthly accounting periods are also popular in these businesses. The financial statements for monthly accounting periods, on the other hand, are likely to be used only by the management of the companies.

 

The objective of such a time period is to allow financial statements to be created and presented to investors, as well as to compare business performance over time.

 

A corporation can assess the profit and loss that occurred within a specific time period by preparing financial statements for that time period. In the absence of a suitable accounting period, results will vary, making it difficult to identify the company's financial status at the moment.

 

A 12-month accounting term is standard (1 year). While the time frame is set, the month can differ from one organisation to the next.

 

Also Read | What is a Financial Statement?

 

Requirements for Accounting Periods

 

1. Reliability

 

Accounting periods are defined for the purpose of reporting and analysis. To begin with, accounting periods must be consistent. If an accountant prepares financial statements on a monthly basis, for example, they must do it for every month of the calendar year. 

 

This is known as periodicity, and it provides decision-makers, investors, and banks with a large, consistent sample size from which to make financial health and outlook decisions.

 

In theory, an entity wants its growth to be consistent throughout accounting periods in order to show stability and a long-term profit projection. The accrual method of accounting is the accounting approach that supports this premise.

 

The accrual method of accounting necessitates the creation of an accounting entry whenever an economic event occurs, regardless of when the monetary part of the event occurs. 

 

For example, the accrual method of accounting mandates that a fixed asset be depreciated throughout its useful life. Rather than a comprehensive reporting of expenses when the item was paid for, this identification of an expense over several accounting periods allows relative comparability over this period.

 

2. Matching Principle

 

Another golden guideline to remember while using accounting periods is the matching concept. The matching principle is a fundamental accounting theory that governs the usage of accounting periods. 

 

It mandates that all expenses be recorded within the period in which they were incurred, and that all revenue be reported during the period in which it was obtained.

 

 According to the matching principle, expenses must be reported in the same accounting period that the item was incurred, as well as all corresponding revenue produced as a result of that spending. The time in which the cost of items sold is reported, for example, will be the same period in which the income for the same commodities is reported.

 

According to the matching principle, financial data recorded in a single accounting period should be as full as feasible, and no financial data should be dispersed across numerous accounting periods.

 

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Importance of an Accounting Period

 

Accounting periods give business owners a long-term view of their company's profitability and assist them in making informed business decisions. The periodicity notion was invented by accountants to enable this.

 

The continuing and complex operations of the firm are divided into short time periods and presented in monthly, quarterly, and yearly financial statements using this approach. The company generates and publishes financial accounts for each period. The financial statement's time period is indicated in the headline.

 

For business owners, investors, creditors, and government authorities, this information is critical. The time period assumption provides stakeholders with accurate and timely financial data, allowing them to make informed business decisions.

 

The accounting period chosen is determined by the needs and circumstances of the firm, which may be complicated enough to warrant various accounting periods. As long as legal requirements are met, all businesses are free to define as many periods as they choose.

 

Financial Year vs. Accounting Period

 

The accounting period has no set length and can be any length, including one year or less, and possibly longer. It is divided into two types: calendar year and fiscal year. As a result, it can begin on any month's first day.

 

A financial year, on the other hand, is the time that begins on January 1st and ends on December 31st of the following year (for example 1st April and ending on 31st March of next year). 

 

Thus, the financial year's total duration is one year, and the financial year's beginning and ending dates are fixed and cannot be changed, unlike the accounting period, which can be cut or extended from one year.

 

Also Read | Time Value of Money: Concept, Formula and Benefits

 

What are the Types of Accounting Periods?

 

1. Yearly

 

An annual accounting period is a 12-month period in which business transactions are recorded. A short tax year, according to the Internal Revenue Service, does not classify as a yearly accounting period.

 

• Calendar Year

 

The accounting period is usually based on the Gregorian calendar year, which spans twelve months from January 1 to December 31. This natural sequence of months is followed by the accounting period.

 

This accounting period lasts for the complete calendar year, beginning on January 1st. This means that a company can begin collecting accounting records as soon as the year begins and continue until the conclusion of the year.

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Different types of Yearly accounting periods

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• Fiscal Year

 

The fiscal year is a 12-month period that begins on January 1 and ends on December 31. The International Financial Reporting Standards (IFRS) permit an accounting term of 52 weeks. Many businesses use a 52-week or 53-week fiscal calendar for their financial tracking and reporting.

 

The Internal Revenue Service (IRS) permits taxpayers to record their taxes using either the calendar or fiscal year. Businesses can select the time period in their fiscal year that they want to consider, giving them more time to plan their financial data collection approach. 

 

Accounting firms, seasonal enterprises, and corporations that generate revenue from events that occur at specified times of the year may employ a fiscal year accounting period.

 

A company may, for example, pick a fiscal year that runs from February 1 to January 31 or follow a 52-53-week fiscal year, in which each year alternates between 52 and 53 weeks. If a company wants to choose its fiscal year for tax reporting, it can do so by filing its first income tax return for that year.

 

If a company wishes to switch from a calendar to a fiscal year, it must obtain special clearance from the IRS.

 

• The 4-4-5 Calendar Year

 

The 4-4-5 calendar year divides the year into quarters and is commonly seen in retail. The name comes from the fact that each quarter consists of 13 weeks divided into two 4-week and one 5-week months. 

 

The key benefit of this period is that each period's end date always occurs on the same weekday. With as few different weekdays as feasible, periods can closely match the equivalent period of the preceding year.

 

By allowing for four points throughout the year to prepare financial statements and concluding each period on the same day of the week to preserve consistency, a 4-4-5 calendar year accounting cycle can assist firms assess their financial data.

 

2. Monthly

 

Internal reporting is usually done on a monthly basis in businesses. A monthly report gives a real-time picture of a company's financial health, including cash, assets, inventory, revenue, and orders.

 

• Calendar month

 

An accounting period of a calendar month lasts four weeks and starts on the first day of the month a company wishes to evaluate. Businesses that wish to create financial statements rapidly and evaluate tiny chunks of data at a time may benefit from calendar month accounting periods.

 

• Fiscal month

 

During a company's fiscal year, a fiscal month accounting period can span four or five weeks. A corporation does not have to start on the first of the month because it can set its own fiscal month accounting period. 

 

A corporation can start on a given date and execute accounting operations for four or five weeks after that date to define a fiscal month accounting period, which means there is no mandatory start or end date for a fiscal month.

 

Also Read | All About Monthly Recurring Revenue (MRR)
 

3. Quarterly

 

Three months is the length of a quarterly accounting period. The Securities and Exchange Commission has required publicly listed corporations to provide quarterly reports since 1970. (SEC).

 

• Calendar Quarter

 

A calendar quarter is a three-month accounting term that normally begins at the start of a fiscal quarter. Businesses can finish more than one calendar quarter in a calendar year because calendar quarters only last three months out of the year, giving them additional data to work with. 

 

They can also schedule their accounting periods to coincide with times when they want to examine their financial performance in light of specific events that may occur during that time.

 

• Fiscal quarter

 

A fiscal quarter is a 13-week accounting period based on a company's fiscal year rather than a calendar year. This means that a company might select a 13-week period to review and plan its accounting period to coincide with that timeframe. 

 

The 13 weeks following a certain start date are often used to gather and analyze financial data in fiscal quarter accounting periods.

 

Also Read | Revenue and Turnover

 

Advantages and Disadvantages of Accounting Period

 

The following are some of the advantages of Accounting Period users:

 

1. It aids in the preparation of financial statements that indicate the financial situation of a company over a set period of time.

 

2. It can be used to depict a company's financial situation over a set period of time.

 

3. This approach aids the organization in establishing a formal period during which the books must be closed.

 

4. The notion is important for investors because it allows them to compare the trends of financial results over time.

 

Disadvantages of Accounting Period

 

1. If the matching principle is not followed, it may prove to be fruitless.

 

2. The real explanations for the observed disparities between the periods are not taken into account when comparing two financial periods.

 

3. In case the tax period differs, the need for keeping two separate accounts arises. 

 

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A corporation should choose its accounting period carefully and not modify it unless circumstances necessitate such a change. All accounting transactions linked to must be recorded at the same time, and mandatory accounting arrangements must be established wherever necessary to ensure that the matching principle is not broken.