What Is an Accounting Period Or a Fiscal Year?

What Is an Accounting Period Or a Fiscal Year?
| Updated on: May 10, 2022

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.

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What is accounting period concept?

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.

What is a period assumption?

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.

What are the ten steps of the accounting cycle?

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:

  1. Analysis and classification: When there has been a financial transaction, analyze it and its impact on different accounts. For example, when a transaction happens, analyze it and decide how it will be recorded in the books. The recording of transactions is the foremost step based on which the rest of the accounting cycle grows. In a retail business, the most significant number of transactions will be the POS or point of sale transactions, but there will be so many other transactions that will have to be properly recorded.
  2. Journalizing: Every transaction should be journalized. This should be performed as per the accepted accounting principles. Generally, related revenue and expenses are to be journalized in the same accounting period and are often recorded simultaneously. Double-entry bookkeeping will make two entries for every transaction that is recorded. It helps maintain a balance of the debit and credit that is recorded, whereas single entry bookkeeping does not have this advantage. 
  3. Posting: After journalizing, the entry is posted to a general ledger. The general ledger makes it easy for the accountant to monitor the overall status of a particular account. The most commonly watched general ledger is the cash book. Posting to the general ledger is a critical and vital step when accounting is done manually. However, with the advent of software, all the relevant entries are made automatically.
  4. Unadjusted trial balance: A trial balance is drawn up with the entries in the books of accounts. Each account will show its unadjusted balances. Ideally, if all transactions have been recorded perfectly, this step will perfectly match the credits and debits. If there are any mismatches, the trial balance will catch mistakes.
  5. Recording adjusting entries: The matching principles of expenses and revenues have to be followed in the final reports of the company. The adjusting entries compensate for any revenue or expense that should match but fall outside the accounting period. Adjusting entries journalize events that have not yet been recorded in the books of accounts but must match a corresponding entry.
  6. Adjusted trial balance: The adjusting entries are included, and the adjusted trial balance is prepared. It is a document for internal use and is not submitted to any external authority. The adjusted trial balance gives the accountant the information needed to prepare the income statement, cash flow statement, and balance sheet.
  7. Financial statements: The cash flow statement, income statement, and balance sheets are prepared at the end of the accounting period.
  8. Closing entries: The closing entries transfer the data from the temporary accounts to the final financial reports. These accounts are transferred as they are only applicable to one accounting period.
  9. Closing trial balance: The final trial balance is prepared to confirm that the reports' debits and credits match. It includes the permanent accounts and not the temporary accounts.
  10. Reversing entries: Reversing entries are recorded on the first day of the subsequent accounting period to ensure no double entry for the same transaction in the next accounting period.

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