Accounting Period Concept Meaning, Types, and FAQs

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. The cost concept stops any kind of manipulation while taking into account the net realizable value or the market value. On the downside, this concept ignores the effect of inflation in the market, which can sometimes be very steep.

L Dual aspect concept states that every transaction has a dual effect. A publicly-held company must report back to the Securities and Exchange Commission on a quarterly foundation, so the accounting period for its monetary stories to the SEC span three months. If a set of economic statements cover the outcomes of a whole yr, then the accounting interval is one year. If the accounting interval is for a twelve month period ending on a date apart from December 31, then the accounting period known as a fiscal 12 months, versus a calendar yr.

Accrual Concept

You can compare the business reports of two equal sections of time to compare the company’s performance in other financial aspects. According to the matching principle, financial data recorded in a single accounting period should meaning of accounting period concept be as full as feasible, and no financial data should be dispersed across numerous accounting periods. According to the Objective Evidence concept, every financial entry should be supported by some objective evidence.

An accounting cycle should be strictly followed to ensure proper accounting for and reporting in each accounting period. The act of chopping the continuous stream of business events into time periods is arbitrary. Since business activities do not stop or change significantly as one accounting period ends and another begins. This fact makes the problem of measuring income for an accounting period the most difficult problem in accounting. An annual accounting period is a 12-month period in which business transactions are recorded.

They are applicable either to all or certain types of accounting entities. The financial accounting principles are man made and they are used as a guide to action. They are the result of broad consensus and, therefore, known as Generally Accepted Accounting Principles .

The debit balances are on the left column in such worksheets, whereas the credit balance remains on the right column. The account title is present on the far left of both these columns. A trial balance must have an equal number of total debits and total credits. If the values are not similar, the sheet will be unbalanced with some mathematical errors. However, even having equal credits and debits, there are still chances of errors in the company’s accounting system. It is often combined with the concerned year while reporting, for example, FY21 to denote the financial year of 2021.

Although the basic accounting principles do not explicitly form a part of accounting standards and related rules, they are believed to be generally practised and expected. For example, the Financial Accounting Standards Board , uses these principles as a framework for defining its own accounting standards. The balance sheet is a parameter to check the financial health of the business. It records assets, liabilities, and equity of an organization. The balance sheet analysis enables an investor to derive at the worth of the company. A revenue must be recorded only when it is reasonably certain that it will be realized in the near future.

What is Accounting Period Concept?

It can spare huge accounting fees and auditing costs from being spent externally. In certain cases, the management might want to change the FY, owing to financial or functional reasons. Try these free online courses in accounting from top universities.

Tax payers of the fiscal year are required to pay their taxes on the 15th day of the fourth month after the year ends. For example, a fiscal year functioning between February 1st and January 31st will have its tax due on May 15. Full disclosure entails the revelation of all information, both favourable and detrimental to a business enterprise, and which are of material value to creditors and debtors. Materiality means that all material facts should be recorded in accounting. Accountants should record important data and leave out insignificant information. Conservatism is the convention by which, when two values of a transaction are available, the lower-value transaction is recorded.

In most of the businesses, the accounting year or fiscal year corresponds to the calendar year. But there are many businesses use the natural business year instead of the calendar year. 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.

Consistency

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. The corporation compiles and arranges its financial activity during the accounting period.

The most common period is a month, but the period may be as short as a week or even a day. In case the tax period differs, the need for keeping two separate accounts arises. It can be used to depict a company’s financial situation over a set period of time. 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. While the time frame is set, the month can differ from one organisation to the next.

What is accounting period concept?

For detailed information, you have to follow the following article till to the end. L The effect of cost concept is that if the business entity does not pay anything for an asset, this item will not be shown in the books of accounts. Rs, Rent Paid Rs etc. are expressed in terms of money, and so they are recorded in the books of accounts. But the transactions which cannot be expressed in monetary terms are not recorded in the books of accounts. These principles, which serve as the rules for accounting for financial transactions and preparing financial statements, are known as the “Generally Accepted Accounting Principles,” or GAAP.

These standards issued are amended from time to time keeping in mind the nuances of business. Fixed assets are acquired for use and not for sale in the ordinary course of business. Some companies may use the regular calendar year as their fiscal year, while others may use the fiscal period . For example, Mr. A starts a new business in the name and style of M/s Independent Trading Company and introduced a capital of Rs 2,00,000 in cash. It means the cash balance of M/s Independent Trading Company will increase by a sum of Rs 2,00,000/-.

This enables consistency and helps in effective comparison of the financial statements and financial position of different companies. The accounting principles that an organization follows depends on the regulatory and reporting requirements of the region and audience to which a business caters. A standard is something which is used as the basis for comparison, It is a measure by which quality of other things is judged. They the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transaction and disclosure of accounting transactions in the financial statements.

• It means that revenues are recognised when they become receivable.
• If money is not used as a common unit of measurement it would be impossible to record various types of transactions.
• In the previous lesson, you have studied the meaning and nature of business transactions and objectives of financial accounting.
• It means the collection of cash and payment in cash is ignored while calculating the profit or loss of the year.
• Accounting conventions are the statements of practice or principles which are followed as accepted method or procedures by the enterprises over a period of time.

An accounting period is when the financial statements are prepared to ascertain a company’s economic performance. The preparation of financial statements at periodic intervals helps take timely corrective action and develop appropriate strategies. Moreover, the accounting period is generally twelve months, although it may be for three months or six months in case of a new startup. Preparation of financial statements works as profit calculation, tax calculation, submission of reports to regulators and other Government agencies, etc. Companies may also select between single-entry accounting vs. double-entry accounting.

Accounting principles are derived from experience and practice. If persons from the accounting profession, in general, accepts a solution for a particular problem it becomes an accounting principle. The evolutionary process of accounting principles is going on continuously. This concept says break the life of a business into equal pieces and each piece is known as accounting period. According to this concept, accounts should be prepared after every period & not at the end of the life of the entity.