What is an accounting period?

These different types of accounting periods have their unique characteristics, implications, and utility. A business may generate income even before receiving payment, for instance, if it permits clients to purchase items on credit. The business will record revenue and accounts receivable at the time of service or when transferring an item to the consumer. According to the revenue recognition principle, income should be recorded as soon as it is earned rather than when money is transferred. For example, a business may choose a fiscal year from Feb. 1 to Jan. 31 or observe a week fiscal year, where each year rotates between being 52 or 53 weeks long. If a business wants to select the fiscal year for tax reporting, they can do so by submitting their first income tax return observing that tax year.

For that reason, we compiled all the necessary information about the matter in this article—read on to see our simple accounting period explanation. If a company hasn’t earned revenue when cash is received, it will need to set up a deferred revenue account which indicates the revenue has not yet been earned. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. The following video provides a brief overview of the concept of the accounting period. However, based on the matching principle, the commission would be recognized in the month of March, along with any other expenses that are directly related to the generation of that revenue.

For instance, the accrual method of accounting mandates that fixed assets be depreciated over the course of their useful lives. As opposed to recording a whole expenditure at the time the item was purchased, expenses are recognized across a number of accounting periods, allowing for relative comparability between them. Accounting periods are useful to analysts and potential shareholders because it allows them to identify trends in a single company’s performance over a period of time. They can also use accounting periods to compare the performance of two or more companies during the same period of time.

Financial Statements to Which the Accounting Period Applies

This is the reason why Coke’s reporting calendar has differences in the number of days between the first and fourth quarters. The matching principle and the revenue recognition principle are the two fundamental accounting principles that control the usage of accounting periods. The balance sheets, on the other hand, provide a picture of the assets, liabilities, and equity of a firm at a certain moment in time, meaning the end of the accounting period. The end day of the accounting period will be stated in the heading, for instance, “as of June 30, 20XX.”

Each accounting period corresponds to the same accounting period in the previous year and the next year. Provides a review and forecast tool for management and helps in comparative analysis. Usually, the accounting period follows the Gregorian calendar year that consists of twelve months starting from January 1 to December 31.

The length of an accounting period can be measured in weeks, months, quarters, fiscal years, or calendar years. 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. For example, if a business were to be shut down on January 10, its final monthly accounting period would only cover the period from January 1 to January 10.

Is an Accounting Period Always 12 Months?

In management accounting the accounting period varies widely and is determined by management. Another example that shows the benefit of using accrual over cash basis of accounting is when a real estate developer is constructing a building over two years. If the developer uses the cash basis of accounting, the entire revenue is recorded at the end of the second year, with only expenses being recorded for the two-year duration. Use Wafeq to manage your accounting and to keep all your expenses and revenues on track, plus manage payroll and inventory, and generate over 30 financial reports from one place.

It enables a better comparative analysis for the company based on weekly reports but may welcome unnecessary aberrations on the basis of a ‘5-week month’. Companies in the manufacturing industry usually follow a calendar year as the end date of the period falls on the same day every how to calculate your adjusted gross income week. The revenue recognition principle is a key accounting theory utilized in the accrual method of accounting. Theoretically, a corporation aspires to expand consistently over the course of accounting periods in order to demonstrate stability and a view of long-term profitability.

1. For example, if a business were to be shut down on January 10, its final monthly accounting period would only cover the period from January 1 to January 10.
2. Austin specializes in the health industry but supports clients across multiple industries.
3. Use Wafeq to manage your accounting and to keep all your expenses and revenues on track, plus manage payroll and inventory, and generate over 30 financial reports from one place.
4. 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.

A fiscal year arbitrarily sets the beginning of the accounting period to any date, and financial data is accumulated for one year from this date. For example, a fiscal year starting April 1 would end on March 31 of the following year. The federal government has a fiscal year that runs from October 1 to September 30, while many nonprofits have a fiscal year that runs from July 1 to June 30.

Why Is an Accounting Period Important?

The depreciation and consequent spreading of expenses across several periods, using the depreciation example from earlier, better align the usage of fixed assets with its capacity to produce income. The accounting period is stated in the headers of financial statements like the income statement and balance sheet. 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.”

Lack of using proper bookkeeping periods while presenting results in inconsistency among different versions of financial statements that can create confusion among the stakeholders. Monthly accounting periods are primarily used when catering to the internal stakeholders for their analysis, such as that of product growth or to build strategies to combat the festive or holiday demand for the products. However, a drawback to the calendar is the addition of a 53rd week every five or six years making the comparison between financial statements of two bookkeeping periods difficult. The business will be prepared to generate its financial reports for that accounting period after all closing entries have been done. The accounting period is helpful while investing because those interested may assess a company’s performance by looking at its financial statements, which are based on a set accounting period.

The choice of accounting period depends on the business needs and circumstances which might be complex enough to warrant different accounting periods. All businesses are allowed to define as many periods as they want as long as they meet legal requirements. This https://www.quick-bookkeeping.net/how-to-file-taxes-with-irs-form-1099/ information is significant for business owners, investors, creditors and government agencies. The time period assumption provides the stakeholders with the reliable and relevant financial information to make reliable business decisions in a timely manner.