Accounting Period Concept
Accounting Period: Definition
The concept of an accounting period is used to segment the life of a business into equal pieces. Accounting periods must conform to the principle of consistency.
Accounting Period: Explanation
Accounting periods are used to estimate the profit, loss, and financial position of a business for a specific time window. If different accounting periods are used, then problems can arise in terms of calculating profits and the comparability of incomes and expenses.
Therefore, to study the results of a business, its life is divided into short periods of equal length. Each of these periods is known as an accounting period.
While the true profit or loss of a business can only be determined when the business finally closes down, it is clearly unwise to wait that long before learning about its financial health.
Accounting information is required regularly by all stakeholders. Therefore, it should be prepared on an ongoing basis.
To ensure that there is a reliable and comparable set of financial statements, the performance and position of a business are measured at the end of the accounting periods.
Generally, an accounting period lasts one year. 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.
The year may not necessarily be a calendar year. For example, it may run from January to December or from the July of one year to the June of the next.
The fact that financial statements are prepared according to accounting periods necessitates certain adjustments. For example, when a car is purchased, its cost must be apportioned over the various accounting periods in which it will be used.
The accounting period principle requires that such adjustments are made judicially and that an accounting record is created accordingly.
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About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.