Accounting Period: is a time frame that is used as a reference when preparing financial statements.
Accounting Period Details
An accounting period is a specific period of time a company has established when preparing financial documents. This reference time varies from company to company and is influenced by the accounting system that the company uses.
In management accounting, where managers use the accounting information to make informed decisions within the organization, they can choose any accounting period. However, an accounting period is regulated in financial accounting, where the financial statements are prepared for public use. Usually, the accounting period for financial accounting is 12 months in length.
Although the accounting period for financial accounting is 12 months, the exact beginning of an accounting period varies. Some companies use the calendar year, which means that the accounting period will start on January 1st and end on December 31st. Others may begin their accounting period in September and end in August of the following calendar year.
In management accounting, the degree of freedom is higher as managers choose any time frame. Many managers choose a monthly accounting period as it is not too short and not too long. It provides them with information to plan the following month. Managers of other companies whose nature of business requires more frequent financial updates may choose weekly accounting periods that may start on Monday and end on Sunday.
Fiscal years are financial accounting periods that do not follow the calendar year of January to December. For example, a company may choose April 1st to March 31st as its fiscal year. Companies also use other in-between accounting periods such as the first quarter, second quarter, third quarter, and fourth quarter. For a calendar financial accounting period, the four quarters are defined as:
- First-quarter: January 1st to March 31st.
- Second-quarter: April 1st to June 30th.
- Third-quarter: July 1st to August 31st.
- Fourth-quarter: September 1st to December 31st.
Examples of Accounting Periods
Accounting periods vary, and this list comprises some of the accounting periods widely used by companies.
- 52-week fiscal year: Permitted by the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP). In the US, it is called the 52-53-week fiscal accounting period.
- Calendar year: Beginning on January 1st and ending on December 31st.
- Fiscal year: Begin and end on any chosen day. An example of a fiscal year starts on July 1st and ends June 30th.
- Monthly accounting periods: Follows calendar months, such as March 1st to March 31st or November 1st to November 30th.
- 4- or 5-week fiscal months: Example of a fiscal month ends on the last Saturday of February.
Accounting periods must meet the criteria below to be acceptable:
- Consistency. Accounting periods are established to provide a reference time for the preparation and analysis of financial information. To accurately compare a company's growth, the time frame for comparing financial statements should be consistent. Suppose the accounting period for one financial statement is one week and the accounting period for another statement is one month. In that case, it will be difficult to compare the documents and determine if the organization has grown or not.
- Matching Principle. You should choose an accounting period such that it aids in achieving the matching principle. The matching principle is a principle in accrual accounting that aims to match expenses to their corresponding revenue in the accounting period. The principle requires that if an expense is made and revenue is generated based on the expense, the revenue should be recorded in the same accounting period as the expense. Companies should record expenses at the time they are incurred. Companies should also record revenue at the time they are earned even though the cash is yet to be received.