Accounting Period: What It Is, How It Works, Types, Requirements

what is an accounting period

An accounting period is the period of time covered by a company’s financial statements. However, the financial statements for the monthly accounting periods are likely to be used only by the companies’ managements. It is also common for U.S. retailers to have accounting periods that end on a Saturday. The annual accounting period for these businesses may be the 52- or 53-week fiscal years ending on the Saturday closest to February 1 or any other date. The retailers’ quarterly accounting periods will be the 13-week periods, and the monthly accounting periods will be a 4- or 5-week time period. This period defines the time range over which business transactions are accumulated into financial statements.

Austin specializes in the health industry but supports clients across multiple industries. Accounting period provides business owners the perspective about the profitability of the business on an ongoing basis and helps them make informed business decisions. In case a business wants to change from a calendar year to a fiscal year, they would need special permission from the IRS.

what is an accounting period

This is the common calendar structure for some retail and manufacturing industries. Each quarter has thirteen weeks which are grouped into one 5-week month and two 4-week months. Internally, the accounting period is considered to be a how to turn your ideas into action month or a quarter while externally it is for a period of twelve months. The International Financial Reporting Standards (IFRS) allows a 52-week period (also known as the fiscal year), instead of a full year, as the accounting period.

– Accrual Accounting In Terms Of Accounting Periods

However, there are many business entities that follow the accounting period of three months or six months. The end of the fiscal year would move one day earlier on the calendar each year (two days in leap years) until it would otherwise reach the date four days before the end of the month (August 27 in this case). At that point the first Saturday in the following month (September 3 in this case) becomes the date closest to the end of August and it resets to that date and the fiscal year has 53 weeks instead of 52.

  1. In the U.S., some companies have annual accounting periods that end on dates other than December 31.
  2. Closing a period may take days, weeks, or even months into the next accounting period, and two periods can run simultaneously as the previous period is closed out.
  3. According to the matching principle, costs must be recorded within the same accounting period as the related revenue.
  4. For example, Nestle, Tesla, and GlaxoSmithKline are some of the multinational companies that follow a calendar year (January to December) as their reporting period.

In the U.S., some companies have annual accounting periods that end on dates other than December 31. For example, a company could have a fiscal year of July 1 through the following June 30. If a set of financial statements cover the results of an entire year, then the accounting period is one year. If the accounting period is for a twelve month period ending on a date other than December 31, then the accounting period is called a fiscal year, as opposed to a calendar year. For example, a fiscal year ended June 30 spans the period from July 1 of the preceding year to June 30 of the current year.

Definition of Accounting Period

A calendar year with respect to accounting periods indicates that an entity begins aggregating accounting records on the first day of January and subsequently stops the accumulation of data on the last day of December. After all closing entries are made, the company will be ready to run its financial reports for that accounting period. Closing a period may take days, weeks, or even months into the next accounting period, and two periods can run simultaneously as the previous period is closed out. No, an accounting period can be any established period of time in which a company wishes to analyze its performance. Potential investors can evaluate a company’s performance for investment purposes by looking at its financial statements, which are based on a specific accounting period.

what is an accounting period

A fiscal year arbitrarily sets the beginning of the accounting period to any date, and financial data is accumulated for one year from this date. For example, a fiscal year starting April 1 would end on March 31 of the following year. The federal government has a fiscal year that runs from October 1 to September 30, while many nonprofits have a fiscal year that runs from July 1 to June 30.

It enables a better comparative analysis for the company based on weekly reports but may welcome unnecessary aberrations on the basis of a ‘5-week month’. Companies in the manufacturing industry usually follow a calendar year as the end date of the period falls on the same day every week. The revenue recognition principle is a key accounting theory utilized in the accrual method of accounting. Theoretically, a corporation aspires to expand consistently over the course of accounting periods in order to demonstrate stability and a view of long-term profitability.

4-5 Calendar Year

The cycle begins the financial books at the beginning of each period with reversing entries and closes the books at the end of a period with year-end closing entries. To complete this cycle, businesses must prepare the financial statements before the start of the next accounting period. An entity may also elect to report financial data through the use of a fiscal year.

Revenue recognition principle

Ideally, the fiscal year should end on a date when business activity is at a low point, so that there are fewer assets and liabilities to audit. An important accounting rule used in the accrual method of accounting is the revenue recognition principle. The revenue recognition principle states that revenue should be recognized when the money is earned, not when the cash changes hands. For example, a company may earn revenue prior to receiving cash if it allows customers to make purchases on credit.

Lack of using proper bookkeeping periods while presenting results in inconsistency among different versions of financial statements that can create confusion among the stakeholders. Monthly accounting periods are primarily used when catering to the internal stakeholders for their analysis, such as that of product growth or to build strategies to combat the festive or holiday demand for the products. However, a drawback to the calendar is the addition of a 53rd week every five or six years making the comparison between financial statements of two bookkeeping periods difficult. The business will be prepared to generate its financial reports for that accounting period after all closing entries have been done. The accounting period is helpful while investing because those interested may assess a company’s performance by looking at its financial statements, which are based on a set accounting period.

There are typically multiple accounting periods currently active at any given point in time. For example, assume the accounting department of XYZ Company is closing the financial records for the month of June. This indicates the accounting period is the month (June), although the entity may also wish to aggregate accounting data by quarter (April through June), half year (January through June), or an entire fiscal year.

Based on the cause-and-effect relationship, the matching principle of accounting states that any expenses incurred in the bookkeeping period must be recorded in the same period that the related revenues were generated. The accrual method of accounting prescribes recording revenue and expense transactions when they occur as opposed to the date of receipts and payments. Hence, the company records revenue from credit sales of products long before receiving payment on the same and vice versa. The accounting period principles encompass a range of issues, such as the matching principle, which aims to align revenues and expenses within the same period to reflect profitability accurately. The principles guiding the selection and application of accounting periods are nuanced and multifaceted, tied intrinsically to legal requirements and strategic business considerations. In this type of period, the year is divided into four quarters, wherein each quarter consists of two 4-week months and one 5-week month.

The depreciation and consequent spreading of expenses across several periods, using the depreciation example from earlier, better align the usage of fixed assets with its capacity to produce income. The accounting period is stated in the headers of financial statements like the income statement and balance sheet. Technically, an accounting period only applies to the income statement and statement of cash flows, since the balance sheet reports information as of a specific date. Thus, if an entity reports on its results for January, the header of the income statement says “for the month ended January 31,” while the header of the balance sheet states “as of January 31.”

The length of an accounting period can be measured in weeks, months, quarters, fiscal years, or calendar years. Yet another variation on the accounting period is when a business has just been started, so that its first accounting period may only span a few days. For example, if a business begins on January 17, its first monthly accounting period will only cover the period from January 17 to January 31. For example, if a business were to be shut down on January 10, its final monthly accounting period would only cover the period from January 1 to January 10.