What Is An Accounting Period?
Definition: An accounting period is defined as the period of time for which a business performs its accounting functions and prepares financial statements to report all of its financial performance and position to external stakeholders.
The accounting period is when financial transactions are performed, calculated, and analyzed before being assimilated into the financial statement for that period. An accounting period may be either a calendar year, a fiscal year, or a shorter duration, like a month or even a week. For internal reports, generally, an accounting period would be one month. Additionally, some firms compile their financial statements in four-week increments, so they have 13 accounting periods every year.
Different accounting activities like making an income statement, balance sheet, monthly accounting, annual accounting, etc are channelized as per the given accounting period.
Some of the common examples of accounting periods that US companies use are-
- Annual calendar year of January 1 through December 31
- Calendar quarters like January 1 through March 31, April 1 through June 30, etc.
- The annual fiscal year for instance July 1, 2020, through June 30, 2021; April 1, 2020, through March 31, 2021; etc.
- Fiscal quarters like May 1 through July 31, August 1 through October 31, etc.
- 52- or a 53-week fiscal year or instance the 52 or 53 weeks ending on the last Saturday of January, etc.
- 13-week fiscal quarters like 13 weeks ending on the last Saturday in April, etc.
- Calendar months like March 1 through March 31, November 1 through November 30, etc.
Types of Accounting Period
1. Calendar Year
The accounting period may be considered the calendar year, starting on January 1st and ends on December 31st. Alternatively, it could be a fiscal year. The accounting period would commence on the first of any month before culminating on the last day of the equivalent previous in the following year.
It is also typical for a business entity to have multiple concurrent accounting periods active at any given time. For instance, a company may be closing the books for May, although this data may also be aggregated into the books for the second quarter of the year (from April to June). This information may also be found in the header of the financial statements.
So, if a firm used the fiscal year in the previous year as a means to represent its financial statement, the header might read “for the year ended on March 31st, 2021”. Balance sheets cover the end of the accounting period and are prepared at the very end, which is also why they’re also referred to as the “final accounts”.
2. Fiscal Year
It is associated with an annual period that does not end on December 31. IFRS i.e. International Financial Reporting Standards suggests 52 weeks as an accounting period.
You can find so many companies that follow the 52 or 53 weeks fiscal calendar for channelizing their financial tracking and reporting activities. The Internal Revenue Service (IRS) lets taxpayers either use the calendar-year taxpayers or fiscal-year as their tax year for tax reporting.
3. 4-4-5 Calendar Year
This is one of the general calendar structures that retail and manufacturing industries follow. In this, one year is divided into 4 quarters.
Each of the quarters has thirteen weeks which are grouped into two 4-week months and one 5-week month. One of the key benefits of this type of accounting period is that the end date of the period is always the same day of the week.
The Accounting Period Cycle Concept
A business firm gathers and keeps track of its financial transactions through the course of an accounting period. The data acquired as a consequence is used to create and publish financial statements at the culmination of the accounting period.
An accounting period may be taken as the time it takes to complete an accounting cycle of the business. In other words, one accounting cycle equals one accounting period.
The cycle begins with the financial entries being reversed and closing the books of the previous cycle. To complete this cycle, businesses will have to prepare the financial statements before the next accounting period commences.
Regulations for Accounting Periods
Accounting periods are used primarily for two purposes – reporting progress to shareholders and for future analysis. Firms need to prepare financial statements to display stability and develop an outlook towards long-term profitability. This method of accounting is supported by the theory of the accrual method of accounting, which requires that an accounting entry be made when the transaction is made, as opposed to when the money is received or paid. In other words, consistency is critical.
Another regulation for accounting periods is that they must obey the matching principle rule. This rule indicates that all expenses should be reported in the accounting period in which they are incurred and that all income generated due to said expense also be reported in the same accounting period. This essentially indicates that the financial data presented in one accounting period’s financial statements should be as complete as possible and should not be spread across multiple accounting periods.
The accounting period was developed to enable business owners to gain clarity with regard to the business’s profitability regularly and to use this information to make better decisions. For these reasons, the accountants developed the periodicity concept, which divides the business’ undertakings into monthly, quarterly and financial years.
The financial statements published at the end of every accounting period are significant for the stakeholders, investors, creditors, and government agencies. This data provides the stakeholders with relevant and reliable data that can be employed to make crucial decisions. A business can have as many accounting periods as it needs to, provided it complies with all its legal requirements.
Accounting periods offer consistency as it lets business check their growth across different accounting periods. The accrual method of accounting also works upon the accounting period, plus the matching principle is also based upon them.
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