What Is Time Period Assumption?
Time period assumption means that a company uses financial reporting based on its own chosen periods. It is an accounting method that allows companies to show their earnings and balance sheets more favorably than they would be if they were using one of the other methods.
When Do Time Period Assumptions Occur?
Time period assumptions occur when the company uses different periods than one year to account for its revenues and expenses. For example, a company could report on an income statement that it has $100 million in revenue over six months instead of reporting $200 million if it had used one full year. The same goes for expenses; they might be reported at 50% rather than 100%.
Why Do Companies Use Time Period Assumptions?
There are a couple of reasons why companies use time period assumptions. The first reason is that many businesses have very different levels of activity during certain parts of the year, and it would not be accurate to report all revenues and expenses for each month in full detail. Another reason might be because some business transactions occur over long periods while others happen very quickly. For example, a construction company might have some large projects that last for several months and others where the work is done in just one day. Another reason is revenue doesn’t always line up with an accounting period, so they use the time period that best represents it.
Uses of Time Period Assumption
There are three ways that companies can account for their revenues and expenses using the time periods assumption. The first way is to report one month’s worth of revenue or expense at a time, which would show more volatility on the income statement than if it had used all twelve months’ worth of data. The second way is to report the average monthly revenue or expense over a number of months. This would give readers an idea about how much activity there was during each month. The third way is to report the total revenue or expense for a quarter at a time. This method gives readers an idea of how much was earned and spent in each accounting period, but it doesn’t detail what happened throughout that period.
Examples of Using the Time Period Assumption
Let’s try to look at an example of how the time period assumption might be used. A company reports its revenue for the year in one month instead of twelve. Readers can see that there is $100 million in total revenue, but they don’t know much about how it was earned or what months were particularly strong or weak. Another example would be if a business reported both February and March revenues together because their revenues were about the same. Also, if a company has experienced significant fluctuations between different months, they might change their reporting timeframe from one month to every three months. Another example is if a business reports its quarterly expenses as one total amount instead of breaking it down into each quarter.
Pros and Cons of the Time Period Assumption
There are some pros to using time period assumptions in accounting, such as:
- It provides a more precise view of how business is doing throughout each month or quarter instead of just one full year.
- It allows companies to smooth out earnings over different time periods.
- It provides a more accurate report of the value of assets and liabilities that are held for long periods, such as property or equipment used in a business’s operations.
There are also some cons to using the time period assumption. These are:
- Some critical information is lost when too many assumptions about revenue and expenses over shorter periods of time are made.
- It doesn’t give a complete picture of the activity in each accounting period, so it can be misleading to some readers.
- If assumptions are made about revenues and expenses for too long, important information will be lost when they don’t line up with revenue from finished projects or when an income statement is being used to forecast future earnings.
Time period assumptions are used to provide a more accurate picture of the value of assets and liabilities held for long periods and how business is doing throughout each month or quarter. However, there can be some downside to using this accounting method if too many assumptions are made about revenue and expenses over shorter periods. It is important to take note that there will always be different ways of presenting accounting data because every business is unique. You should do what you think works best for your company while being transparent with your readers about any assumptions made to provide the most accurate picture possible.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, 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.