accounting period concept definition: What is Accounting Period Concept? Full Explanation with Example

The issuance of financial statements and the time frame that the statements report in are what defines the length of the period. No, an accounting period can be any established period of time in which a company wishes to analyze its performance. Using the example of depreciation from above, the depreciation and subsequent spread of expense over multiple periods better matches the use of fixed assets with its ability to generate revenue.

These conventions help in standardizing the financial reporting process, disclosure of transactions, and relevance. 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. If assigning the monetary value to the transactions is not possible, it will not be recorded in the financial statement. Technically, an accounting period only applies to the income statement and statement of cash flows, since the balance sheet reports information as of a specific date. Thus, if an entity reports on its results for January, the header of the income statement says “for the month ended January 31,” while the header of the balance sheet states “as of January 31.”

For example, the sale of goods worth Rs. 10000, purchase of raw material Rs. 5000, rent paid Rs.2000 are expressed in terms of money, hence these transactions can be recorded in the books of accounts. Similarly, expenses are recognized at the time services are provided, irrespective of the fact that cash paid for these services are made. The periodicity concept states that the entity or the business needs to carry out the accounting for a definite period, usually the financial year. The period for drawing financial statements can vary from monthly to quarterly to annually. It helps in identifying any changes occurring over different periods. Hence, an income statement shows the company’s financial performance over one year, while a balance sheet shows the financial position at the end of a year.

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The accounting period maximum times coincides with the business’s fiscal year. There are other business entities that follow the accounting period of three or six months. An accounting period is defined as the established time period during which the accounting functions are performed. The functions are aggregated and analyzed in the same calendar or the fiscal year. An adjusting journal entry occurs at the end of a reporting period to record any unrecognized income or expenses for the period. Accounting periods are created for reporting and analyzing purposes, and the accrual method of accounting allows for consistent reporting.

It is the most typical accounting period concept definition format, particularly in retail and manufacturing. A year is divided into four halves according to the calendars, and each quarter consists of 13 weeks divided into a five-week months and two four-week months. This data is essential for business owners, investors, creditors, and government agencies. The term realization concept states that revenue earned from any business transaction should be included in the accounting records only when it is realized. The term realization implies the creation of a legal right to receive money.

Accrual AccountingAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. 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. The concept of an accounting period is used to segment the life of a business into equal pieces. An accounting period may be taken as the time it takes to complete an accounting cycle of the business.

The data acquired as a consequence is used to create and publish financial statements at the culmination of the accounting period. The period assumption allows stakeholders to make timely business decisions by providing them with reliable and relevant financial data. This accounting period is chosen based on the business needs and conditions, which may be too complicated to warrant other accounting periods. As a result, all businesses are free to define as many periods as they need as long as they comply with the law.

In this time frame, a business prepares its own financial statements and reports the financial performance and position of its business to the external or the interested stakeholders. The term “accounting period” refers to the predetermined time frame during which all accounting transactions are documented, and financial statements are collected to be presented to investors. The time period assumption allows a company to report financial activity for a period of time.

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Accordingly, any expenses incurred by the owner for himself or his family from business will be considered as expenses and it will be represented as drawings. He purchased goods for Rs 50,000, furniture for Rs. 40,000, and plant and machinery for Rs. 10,000 and Rs 2000 remained in hand. These are the assets of the business and not of the business owner. According to the business entity concept, Rs.1,00,000 will be assumed by a business as capital i.e. a liability of the business towards the owner of the business. Accounting concepts act as an underlying principle that helps accountants in the preparation and maintenance of business records. The importance of the accounting concept is visible in the fact that its application is involved in every step of recording a financial transaction of the entity.

• Since the purpose of a cycle is to record transactions over a period of time and report them in the form of financials, it only makes sense the one cycle equals one period.
• The accounting period is the time it takes to complete the accounting cycle.
• 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 period for drawing financial statements can vary from monthly to quarterly to annually.
• For example, the plant and machinery was purchased by a company of Rs. 10 lakhs and its life span is 10 years.

As stated above in the matching concept, the revenue generated in the accounting period is considered and the expenditure related to the accounting period is also considered. Based on the accrual concept of accounting, if we sell some items or we rendered some service, then that becomes our point of revenue generation irrespective of whether we received cash or not. All the expenses paid in cash or payable are considered and the advance payment of expenses, if any, is deducted. For example, the plant and machinery was purchased by a company of Rs. 10 lakhs and its life span is 10 years. According to the Going concept, every year some amount of assets purchased by the business will be represented as an expense and the balance amount will be shown as an asset in the books of accounts. The accounting cost concept states all the business assets should be written down in the book of accounts at the price assets are purchased, including the cost of acquisition, and installation.

Dual Aspect Concept

It means M/s Independent Trading Company is liable to pay Rs 2,000,000 to Mr A. The end of the fiscal year would move one day earlier on the calendar each year until it would otherwise reach the date four days before the end of the month . At that point the first Saturday in the following month becomes the date closest to the end of August and it resets to that date and the fiscal year has 53 weeks instead of 52. In this example the fiscal years ending in 2011 and 2016 have 53 weeks. The end of the fiscal year would move one day earlier on the calendar each year until it would otherwise reach the date seven days before the end of the month .

Any other transfers or transactions which do not involve any money transfer are not recorded into the accounts books. The business entity concept assumes that business owners are completely separate entities from the business. The accounting books are kept separated from the books of the business owners. It means, the cash received in a particular accounting period and the expenses paid cash in the same accounting period is the basis of their accounting.

The Ihttps://1investing.in/ can be very unforgiving when it comes to mistakes or inconsistencies on financial statements; they have no qualms about adding fines and fees to your balance. On the other hand, the sale of goods on the credit of $2000, will be recorded as an income because the ownership of the goods has transferred to buyers even though it was not received in cash. In the concept of cash, businesses record only cash transactions. In the case of the accrual concept, businesses record both cash and credit transactions. On the other hand, revenue expenses that were payable but not paid in the current accounting year will also be treated as expenses in the current accounting period. Businesses will only record those transactions which for measurable in terms of money.

Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. ClearTax can also help you in getting your business registered for Goods & Services Tax Law. If it is publically listed, it must disclose its performance every quarter, if it is a private company, it is left to the company on how or whether it discloses its financial performance.

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Long-term liabilities have due dates of more than one year.The term also appears in a type of business structure known as a limited liability company . LLC structures allow business owners to separate their personal finances from the company’s finances. As such, owners cannot be held personally liable for debts incurred solely by the company.

Debt capital covers money obtained through credit instruments such as loans. Accrual basis accounting (or simply “accrual accounting”) records revenue- and expense-related items when they first occur. Accrual accounting recognizes that $2,000 in revenue on the date of the purchase.

Income statements for management are therefore prepared more frequently. The most common period is a month, but the period may be as short as a week or even a day. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. The accounting period principle requires that such adjustments are made judicially and that an accounting record is created accordingly.

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This concept helps the company set a formal period over which books must be closed. A receipt is an official written record of a purchase or financial transaction. Receipts serve as proof that the transaction took place and allow those transactions to be processed for tax purposes. Accounts receivable tracks the money owed to a person or business by its debtors.

Cash flow describes the balance of cash that moves into and out of a company during a specified accounting period. Revenues and expenses recognized by a company but not yet recorded in their accounts are known as accruals . By definition, accruals occur before an exchange of money resolves the transaction. Accounts receivable are sometimes called “trade receivables.” In most cases, accounts receivable derive from products or services supplied on credit or without an upfront payment.

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Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making. Conservatism ConceptThe conservatism principle of accounting guides the accounting, according to which there is any uncertainty. In contrast, all the revenues and gains should not be recorded, and such revenues and profits should be recognized only when there is reasonable certainty of its actual receipt. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc. Yet another variation on the accounting period is when a business has just been started, so that its first accounting period may only span a few days. For example, if a business begins on January 17, its first monthly accounting period will only cover the period from January 17 to January 31.

If you need help with managing your books and payroll give these guys a shout. Much like the calendar year, the fiscal year is a 12 month, 365 day period. However, the start and end dates are flexible; for example, a business’s fiscal year could start on July 1st and conclude on June 30th. The IRS allows businesses to choose which year to use, but the choice is hard to reverse. Switching from calendar to fiscal or vice versa would require special permission given only if certain circumstances are met. In case of situations such as a merger or an acquisition, if an organization wants to change its accounting period, such a change is difficult to be done.