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Explain Accounting Period Concept with reference to concept of a

  • By gtatech
  • May 13, 2022

The company generates and publishes financial accounts for each period. The financial statement’s time period is indicated in the headline. 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. These reports are essential to understand the company’s finances.

account period concept

Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Regardless of when the monetary portion of an economic transaction happens, the accrual method of accounting requires an accounting entry to be made. S are used to report and analyse data, and accrual accounting methods ensure consistency. 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. The financial statements report on five main aspects of a business.

What is Accounting Period Concept? Full Explanation with Example

At the end of the said period, the organizations will present its financial statements also known as financial reporting. Financial accounting refers to collecting, summarizing and presentation of the financial information resulting from business transactions. It reports the operating profit and the value of the business to the stakeholders. In other words, financial accounting is used for reporting financial transactions to the stakeholders in a format that is acceptable and adaptable by all businesses.

account period concept

Reporting of all material transactions should be the aim of reporting. Material transactions are those transactions if omitted can alter an investors analysis of the business. This concept stresses that the expenses relating to a particular income must be recorded in the same period. For the latest updates, news blogs, and articles related to micro, small and medium businesses , business tips, income tax, GST, salary, and accounting. It can be used to depict a company’s financial situation over a set period of time.

Economic entity concept

The step-by-step process of doing so is called the accounting cycle, and it starts with a transaction and ends with detailed financial reports. An accounting cycle should be strictly followed to ensure proper accounting for and reporting in each accounting period. 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.

What are the 10 principle of accounting?

  • Principle of Regularity.
  • Principle of Consistency.
  • Principle of Sincerity.
  • Principle of Permanence of Method.
  • Principle of Non-Compensation.
  • Principle of Prudence.
  • Principle of Continuity.
  • Principle of Periodicity.

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. If the matching principle is not followed, it may not be useful. When comparing outcomes from one period to the next, the factual causes for the differences are ignored.

The matching principle is a fundamental accounting theory that governs the usage of accounting periods. 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 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 fiscal year is an annual period that does not end on December 31. The International Financial Reporting Standards generally allows 52 weeks as the accounting period.


Find important definitions, questions, meanings, examples, exercises and tests below for What is Accounting Period Concept?. For organisations that follow the fiscal year begins on the first day of any other month other than January. Board of directors – These are short notes on the topics written during studies. Gross Pay – These are short notes on the topics written during studies. If a company wishes to switch from a calendar to a fiscal year, it must obtain special clearance from the IRS.

  • Some companies may use the regular calendar year as their fiscal year, while others may use the fiscal period .
  • Most of the corporate has to provide annual report to the shareholders as well as income tax reporting on annual basis.
  • In the absence of a suitable accounting period, results will vary, making it difficult to identify the company’s financial status at the moment.
  • Financial accounting refers to collecting, summarizing and presentation of the financial information resulting from business transactions.

Banks are investing money and need to ensure safety and returns, so they request accounting information on a regular basis. Similarly, the government must investigate the company’s tax obligations. Accounting periods are defined for the purpose of reporting and analysis. If an accountant prepares financial statements on a monthly basis, for example, they must do it for every month of the calendar year. The period covered by a company’s financial statements is known as an accounting period.

What is an Accounting Period? Meaning and Types

The statement of cash flows gives the details of cash inflow and outflow in the accounting period. The statement of retained earnings details the distribution of the earnings among the debt repayment, business growth investment, and the business owner’s accounts. Principle divides an organisation’s lifetime into shorter periods so that its performance can be monitored on a regular basis. Company accounting is based on the Going Concern Principle, which means that the company will continue to operate for the foreseeable future. Users of financial statements, especially management and banks, need to prepare financial statements on a regular basis in order to make timely decisions. Management regularly seeks information to analyse performance and resource needs (short-term and long-term).

Hence, all businesses are allowed to define as many periods as they require as long as they meet the legal requirements. The income statement records the revenue and expenses for the financial period. It records all the revenue earned and expenses incurred for that period. It shows the operating account period concept wellness of the organization; this statement also provides the necessary information for tax computation. A revenue must be recorded only when it is reasonably certain that it will be realized in the near future. The heart of financial accounting is the Double entry system of bookkeeping.

This is the most widely used calendar structure, particularly in the retail and manufacturing industries. A year is divided into four halves in the 4–4–5 calendar, and each quarter consists of thirteen weeks divided into one five-week month and two four-week https://1investing.in/ months. Some companies may use the regular calendar year as their fiscal year, while others may use the fiscal period . L It also helps banks, financial institutions, creditors, etc to assess and analyse the performance of business for a particular period.

For different tax periods, there is a need for maintaining two separate accounts. Even though a business is assumed to continue forever but it is necessary to keep accounts in such a way that the results are known at frequent intervals. In case the tax period differs, the need for keeping two separate accounts arises.

In addition to business managers, financial statements are also of interest to investors, creditors, and government agencies to whom they are submitted. Most people evaluating a company will do so by studying the financial statements over a few accounting periods. The 13 weeks following a certain start date are often used to gather and analyze financial data in fiscal quarter accounting periods. For business owners, investors, creditors, and government authorities, this information is critical.

Besides giving the explanation of What is Accounting Period Concept? Has been provided alongside types of What is Accounting Period Concept? Theory, EduRev gives you an ample number of questions to practice What is Accounting Period Concept? The Question and answers have been prepared according to the Commerce exam syllabus.

account period concept

While some companies may use the calendar year for internal purposes, the fiscal year generally starts on the 1st of April. So an annual report would usually span the period of 1st April of a year to the 31st March of the subsequent year. You can compare the business reports of two equal sections of time to compare the company’s performance in other financial aspects. The most commonly generated statements for a time period are the income statement and the balance sheet. The income statement indicates how profitably the company has operated, and the balance sheet gives an overall picture at the end of the financial period.

So for every debit, the matching debit should be recorded in the same accounting time period. So, the accounting time period should be defined clearly to adhere to this principle. A corporation should choose its accounting period carefully and not modify it unless circumstances necessitate such a change. 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.

What are the 2 accounting concepts?

There are two main accounting methods that you can use: accrual basis and cash basis accounting.

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The Internal Revenue Service 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. The accounting period allows the business owner to see the business from a different perspective. Their continued profitability and other business decisions keep them informed. For business owners, investors, creditors,and government authorities, this information is critical. While the time period is fixed, the month can vary from company to company.

This is the most common calendar structure for especially in the retail and manufacturing industries. In the 4–4–5 calendar, a particular year is divided into 4 quarters. With each quarter having thirteen weeks that are grouped into one 5-week month and the other two 4-week months. The Internal Revenue Service allows the taxpayers to either use the calendar year or the fiscal year for reporting their tax. 2.Comparison of two financial periods does not take into account the factual reasons that are behind the observed differences between the periods.

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