What is the purpose of dividing the life of the business in accounting periods?
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March 28, 2019  An accounting period is the time frame for which a business prepares its financial statements and reports its financial performance and position to external stakeholders. This could be after three, six or twelve months. The accounting period usually coincides with the business’ fiscal year. However, there are many business entities that follow the accounting period of three months or six months. Internally, the accounting period is considered to be a month or a quarter while externally it is for a period of twelve months. The International Financial Reporting Standards (IFRS) allows a 52-week period (also known as the fiscal year), instead of a full year, as the accounting period. What this article covers
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area. What Is the Accounting Period Cycle Concept?During the accounting period, a company gathers and organizes its financial activity. This is used to create financial statements at the close of the accounting period. The accounting period can be considered as the time taken to complete an accounting cycle of the business. Since the accounting cycle records transactions over a period of time and reports them in the form of financials, one accounting cycle equals one accounting period. The cycle begins the financial books at the beginning of each period with reversing entries and closes the books at the end of a period with year-end closing entries. To complete this cycle, businesses must prepare the financial statements before the start of the next accounting period. What Are the Types of Accounting Period?The Calendar YearUsually, the accounting period follows the Gregorian calendar year that consists of twelve months starting from January 1 to December 31. The accounting period follows this natural sequence of months. Fiscal YearThe fiscal year refers to an annual period that does not end on December 31. The International Financial Reporting Standards (IFRS) allows 52 weeks as an accounting period. There are many companies that follow the 52 or 53 weeks fiscal calendar for their financial tracking and reporting. The Internal Revenue Service (IRS) allows taxpayers to either use the calendar-year taxpayers or fiscal-year for tax reporting. For example, a business may choose a fiscal year from Feb. 1 to Jan. 31 or observe a 52-53-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. In case a business wants to change from a calendar year to a fiscal year, they would need special permission from the IRS. 4–4–5 Calendar YearThis is the common calendar structure for some retail and manufacturing industries. In the 4–4–5 calendar a year is divided into 4 quarters. Each quarter has thirteen weeks which are grouped into one 5-week month and two 4-week months. The benefit of using this calendar over a regular calendar is that the end date of the period is always the same day of the week. 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. Why Is an Accounting Period Important?Accounting period provides business owners the perspective about the profitability of the business on an ongoing basis and helps them make informed business decisions. To enable this, the accountants have developed the periodicity concept. Using this concept, the business’ ongoing and complex undertakings are divided into short time periods and reported in monthly, quarterly and annual financial statements. For each time period, the business prepares and publishes financial statements. The time period of the financial statement is shown in its heading. This 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. 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. RELATED ARTICLES Why is there a need to divide the indefinite period of operation of a business entity into calendar year or fiscal year?Consideration of seasonal profits
Using a different fiscal year than the calendar year lets seasonal businesses choose the start and end dates that better align with their revenue and expenses. This means a fiscal year can help present a more accurate picture of a company's financial performance.
What is the purpose of the accounting period assumption?The time period assumption in accounting allows a company's activities to be divided into informal time periods so it can produce financial information which individuals can use to make decisions.
What is the main purpose of the accounting function of a business?Why Is Accounting Important? Accounting plays a vital role in running a business because it helps you track income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions.
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