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We often look at the financial accounting reports of companies and businesses. These reports are prepared for a specific period. The time period assumption or periodicity assumption is important in financial accounting and reporting. When you read an accounting report, ensure that you have familiarized yourself with the time period it is prepared for. The time period or accounting period concept may vary from country to country. While specific reports are calculated for a period called the fiscal year, others are prepared on a monthly, quarterly, or half-yearly basis.
The life of a business can and should be divided into equal time periods. The financial reports are prepared for time period assumption, periodicity assumption, or accounting time period. The length of the time period depends on the report and what it is needed for. Generally, an accounting period is a quarter, six months, or a year. The meaning of the report should be inferred depending on the accounting period it is made for.
It is essential to divide the reporting time into equal periods. This helps in evaluating the performance over a period of time and compare it to equal periods of time. Self-evaluation is essential to understand where there is room for improvement. Evaluating the finances of a company over fixed sections of time helps in making decisions based on its financial performance.
The most commonly generated statements for a time period are the income statement and the balance sheet. The income statement indicates how profitably the company has operated, and the balance sheet gives an overall picture at the end of the financial period. The statement of cash flows gives the details of cash inflow and outflow in the accounting period. The statement of retained earnings details the distribution of the earnings among the debt repayment, business growth investment, and the business owner’s accounts.
These reports are essential to understand the company's finances. In addition to business managers, financial statements are also of interest to investors, creditors, and government agencies to whom they are submitted. Most people evaluating a company will do so by studying the financial statements over a few accounting periods.
The period assumption is the division of time into equal sections for financial reporting. The financial reports for specific accounting periods help study the business report trends over successive time periods. For internal purposes, financial reports may be prepared every month. Some companies create statements every four weeks instead of every month. This would create 13 accounting periods in a month.
The primary time periods for the year are the fiscal year which is not always the same as a calendar year. While some companies may use the calendar year for internal purposes, the fiscal year generally starts on the 1st of April. So an annual report would usually span the period of 1st April of a year to the 31st March of the subsequent year. A monthly report would usually be for the calendar month. You can compare the business reports of two equal sections of time to compare the company's performance in other financial aspects.
Another importance of the period assumption is the accounting matching principle. By this principle, the related revenue and expense should be recorded in the same time period. So for every debit, the matching debit should be recorded in the same accounting time period. So, the accounting time period should be defined clearly to adhere to this principle.
The going concern principle assumes that the company will continue to operate without liquidation. By this principle, the accrued expenses for a time period is carried forward to the next. This can only be followed when there is a clearly defined accounting period concept.
Financial accounting starts with the simple recording of a transaction and then moves to the consolidation of the entire company's financial information for a financial period. The step-by-step process of doing so is called the accounting cycle, and it starts with a transaction and ends with detailed financial reports. An accounting cycle should be strictly followed to ensure proper accounting for and reporting in each accounting period.
The ten steps that comprise the accounting cycle are:
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