How do you monitor a company's financial position over time when money keeps flowing in and out of a firm? Accounting periods offer companies a method to summarize and analyze their financial data across a set period.
Why accounting periods?
Recording and analyzing financial information is done in an established timeframe during which accounting functions are measured. This can eg be a calendar or fiscal year, or even shorter periods, such as a quarter, a month, or even a week.
This standard is meant to provide a framework for financial statements. Shareholders and investors may compare the company's financial performance from one accounting period to the next. It makes it easier to see changes, including profits and losses.
The accounting period only has to be applied to a company's cash flow statement and income statement. The balance sheet already contains data from a specified date covering a certain time frame. For example, if a firm is reporting its results for the month of March, the income statement would say "for the month ended March 31," whereas the balance sheet would say ‘as of March 31.’
Types of accounting periods in financial reporting
With the way that financial data is processed, it’s possible for multiple accounting periods to be active at once. For example, a business might look at an accounting time period for the current month, but also aggregate data for the quarter and fiscal year.
Here are some of the different accounting time periods that might be used:
- Fiscal year
- Although many firms start and end their fiscal years on the government tax dates, the fiscal year is whatever you choose it to be. You may pick any arbitrary date to start your company's financial year and accounting period, which would eg begin May 1 and conclude April 30 the following year.
- Calendar year
- A calendar year begins and ends according to the traditional twelve-month calendar cycle. This means your accounting records commencing on January 1st and concluding on December 31st.
- Monthly accounting period
- Some businesses opt for a monthly accounting period plan, which entails gathering accounting records anew on the first of each month. Some people even break it down by week to make things easier when there are significant variations or rapid changes.
Requirements for accounting periods
Whichever accounting period you choose, make sure it is consistent. The main advantage of accounting periods is that they help your company streamline reporting and analysis. Consistency and stability shown to external stakeholders can be leveraged by showing a consistent accounting period in your financial statement. Companies can choose to go with the accrual method of accounting, requiring them to do accounting entries as they happen. This makes it easier to compare cash flow, profit, and losses over time.
Another key factor in setting accounting periods is the so-called matching principle. This refers to expenses being reported in the same accounting period that the expense was incurred. Any resulting revenue resulting as a direct result of the expense should also be reported in the same period.
Financial data is kept balanced and comprehensive throughout each accounting period by applying consistency and the matching principle. This provides a more accurate picture of the company and its financial position.