Accounting Period Definition Types Examples Concepts

Accounting Period Definition

Types of Accounting Period

They are of two types –

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Calendar Year: For those companies which follow the calendar year, it starts on 1st January and ends on 31st December of the same year.Fiscal Year: For those companies which follow the fiscal yearFiscal YearFiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th Septemberread more, it starts from the first day of any month other than January.

How does it Work?

The accounting period serves the purpose of analysis and comparison of the financial data of the company for two different periods. When two different periods are referred to, analysis can be made regarding various financial parameters that suggest the company’s growth or downfall. Therefore, it serves as a reference to such a report and is very useful for the stakeholders.

Examples of Accounting Period Concept

Example #1

A company records its transactions from 1st January to 31st December every year and closes its financials. Here, the accounting period is one year, i.e., 1st January to 31st December.

However, not all companies need to follow one year.

Example #2

A company records its transactions from 1st January to 30th June every year and closes its books of accounts after that. Here, the accounting period is that of half-year, i.e., 1st January to 30th June, and the next period shall be from 1st July to 31st December.

Advantages

The following are advantages and benefits to the users of the financial statementsUsers Of The Financial StatementsFinancial statements prepared by the Companies are used by different categories of individuals and corporates on the basis of their relevancy to the respective parties. The most common users to the financial statements are Management of the Company, Investors, Customers, Competitors, Government and Government Agencies, Employees, Investment Analysts, Lenders, Rating Agency and Suppliers.read more:

It is useful in representing the company’s financial position for a fixed interval.It is useful in comparison of financial data of two or more periods.This concept helps the company set a formal period over which books must be closed.The concept is useful for investors as they can refer to the trends of the financial results over several intervals.

Disadvantages

It may not be useful if the concept of the matching principle is not followed.Comparing the results of one period to another does not consider the factual reasons that led to the differences.If the tax period is different, two separate accounts will be required to be maintained.

Importance

For the company’s financial results to be ascertained, it is crucial to fix “regular intervals” for which accounting transactionsAccounting TransactionsAccounting Transactions are business activities which have a direct monetary effect on the finances of a Company. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. read more shall be recorded, and results shall be compiled. The results of each interval will represent the company’s financial result in each such interval. Thus, the one-by-one comparison is possible only regarding the accounting period. Whether a company has incurred losses or profits is a vague question if any fixed interval is not allotted. Thus, the concept gives meaning to financial statements and helps the investors properly analyze financial results.

Accounting Period vs. Financial Year

The accounting period has no fixed length, and it can be of any length, such as one year or less and maybe more than one year. It has two types, namely calendar year and fiscal year. Accordingly, it can start from the first date of any month.

However, a financial year refers to the period starting of one full year (for example, 1st April and ending on 31st March of next year). Thus, the total duration of the financial year is one year, and the starting and end of the financial year are fixed and cannot be changed, unlike the accounting period where the period can be shortened or extended from one year.

Conclusion

A company shall choose its accounting period wisely and not change it unless the conditions arise such that such change becomes necessary. Therefore, all the accounting transactions relating to it shall be recorded in the same period. Requiring, mandatory accounting provisionsAccounting ProvisionsThe provision in accounting refers to an amount or obligation set aside by the business for present and future commitments. Provisions are estimates of future related probable losses from past and present events calculated by following predefined regulatory guidelines by banks and financial institutions.read more shall be made so that the matching principleMatching PrincipleThe Matching Principle of Accounting provides accounting guidance, stating that all expenses should be recognized in the income statement of the period in which the revenue related to that expense is earned. This means that, regardless of when the actual transaction is made, the expenses that are entered into the debit side of the accounts should have a corresponding credit entry in the same period.read more is not violated.