What Is an Accounting Period?
The accounting period is defined as a period in which the company prepares financial statements, annual reports, quarterly reports, and complicated spreadsheets and then submits them to the regulatory agencies, who review them and either approve or reject them. An accounting period may be quarterly, monthly, or annual. Each type of period has its own set of rules that determine how and when transactions are recorded.
How does an Accounting Period Works?
An accounting period determines the reporting dates of basic financial information, including the business’s first and last month of operations. It is usually the time that a business or owner/manager reports its financial results to others. These reports are used by investors (owners/managers) to understand how their profits or losses compare with those of other competitors within the same industry.
At a high level, the accounting period represents the period by which financial records are closed and reported to investors. This indicates the month’s accounting period, although it may also wish to aggregate accounting data by quarter, half, or an entire calendar year.
Types of Accounting Period
Calendar years concerning accounting periods indicate annual periods or periods of a single year. The calendar year is a period that consists of twelve months. As a result, the first month of each calendar year must fall on a calendar date (inclusive), and the last month of each year must fall on a calendar date (inclusive).
Calendar year accounting periods are used in many industries. For example, they can be used for manufactured products, commerce, financial services, and other industries. Other sectors may also use calendar years to meet their accounting needs.
The purpose of a calendar year type of accounting period is to ensure that one begins and ends each period on the same date.
The Fiscal Year
The Fiscal Year (or Fiscal Year), also known as the accrual period, is used in the accounting system of companies. It’s made up of 52 or 53 weeks (usually 20 or 21 weeks) of the fiscal year, which means you have periods where sales and income are generated, and reports are generated about those transactions. Fiscal years typically end on December 31 or January 31, depending on how it’s calculated.
This technique is used for companies that have regular revenue streams, such as automotive manufacturers.
4–4–5 calendar year
Many financial institutions such as insurance companies, international trade organizations, bankruptcies, trusts, and partnerships use 4-4–5 years as an accounting system. This calendar is divided into 4 quarters that run from March 1 through mid-November. You should avoid the earlier years since these were days when there were more changes due to sales demand and fulfillment issues. The later years (early January through late December) tend to be shorter because stock availability tends to be more sought-after by suppliers in December than in November.
A 4–4–5 calendar year is a great way to manage your payroll when necessary to process many employees or when there is not enough time to process individual debit and credit bills. It is also one of the available options for accounting periods today. This type of calendar is an excellent alternative to a 4–6–6 day calendar.
Creating the accounting period is easier said than done because you need to consider the current and historical deeds, including sales transactions, inventory management, taxes, and other financial statements related to your business’s operation. At the same time, you need to consider what work needs to be done within that period to satisfy accountants’ requirements for preparing tax reports and financial statements. Everything done during one accounting period is considered permanent and cannot be undone except by revising and resubmitting the necessary documents or paying income taxes again.
Requirements for Accounting Periods
Accounting periods are established to provide consistency and accuracy in reporting. Accrual accounting allows business users to gain a birds-eye view of the company (the ability to compare the future with the past easily is essential in decision-making). Using the accrual method of accounting, an end-to-end or all-in approach when recording income and expenses can be observed. Using this method provides relevant financial information about the organization that can be used for a wide range of financial analysis and reporting purposes essential in maintaining business objectives.
In accounting, the matching principle requires that expenses are reported in the accounting period in which the expense was incurred. All associated revenue earned due to that expense is reported in the same accounting period.
The matching principle provides a framework for accounting, allowing a company to report its financial information at a particular moment in time. This principle enables the same business transactions to be reported only once, even if they both occur within the period and the subsequent period. For example, if a company purchases $1000 worth of office supplies during October and incurs another $500 in sales expenses during January, both these expenses would appear on the income statement for December.
Why Is an Accounting Period Important?
The accounting period is a period that internally tracks the status of a company’s financial obligations. Specifically, it comprises the balances of open accounts, unpaid bills, and late payments. In other words, the accounting period tracks all money owed by a company that remains unpaid at the end of each reporting period. Business owners maintain their right to request the presentation of reports and other information during that period and before and after each reporting period.
The purpose of an accounting period is to organize and allow reports and financial information to be prepared at any time to meet internal reporting deadlines. Basic financial statements are generally prepared even if no reports are produced during the period. An accounting period usually starts on the first day that a client or employee reports working for the company and ends on the last day that reports are due for the previous reporting season. In most cases, companies use an indefinite last day because it is convenient for the company and allows them time to prepare employee leaves and other documentation needed to meet reporting requirements.
Business accounting periods are not only important for understanding how your company is doing but are also used by government agencies to track financial trends across an entire industry. An accounting period can vary depending on whether or not taxes and financial information are being collected from individual businesses. Some even create different accounting periods for different industries based on the type of industry it falls under.