An accounting cycle, which typically lasts from a week to a year or more, has beginning and ending accounting periods. Using the financial statements it produces over the course of an accounting period, prospective shareholders assess a company's performance. Your financial career may advance if you get knowledge of these times and how they operate.
Analysts and potential investors benefit from accounting periods since they can use them to spot trends in a single company's performance over a predetermined period of time. The performance of two or more companies during the same period can be compared using accounting periods.
Examples of Accounting Period concept:
- A company records its transactions from 1st January to 31st December every year and closes its financials. Here, the accounting period runs from January 1 to December 31 of the same year. However, not all businesses must adhere to the one-year rule.
- Every year, a corporation keeps track of its transactions from January 1 through June 30 and then closes its books of accounts. The accounting period in this case is a half-year, from January 1 to June 30. The following period will be from July 1 to December 31.
Accounting Period vs. Financial Year
The length of the accounting period is flexible and can range from less than a year to more than a year. It comes in two varieties: fiscal year and calendar year. Therefore, it may begin on any date, including the first of any month.
However, a financial year is the duration beginning with a full year (for example, 1st April and ending on 31st March of next year). As a result, the financial year lasts for a full year, and unlike the accounting year, its beginning and finish are set in stone and cannot be altered.
- It is helpful in displaying the company's financial situation for a specific time period.
- It is useful in comparison of financial data of multiple time frames
- This idea aids the business in establishing a defined period of time for book closing.
- Investors might use the notion to refer to the trends of the financial outcomes over a range of time periods.
- If the matching principle's tenets are not adhered to, it might not be helpful.
- Comparing the results of one period to another is not an apple-to-apple comparison metric.
- If the tax period differs, it will be necessary to maintain two distinct accounts.
Accounting Period Importance
For the company’s financial results to be ascertained, it is crucial to fix “regular intervals” for which accounting transactions shall be recorded, and results shall be compiled Each interval's results will reflect the company's financial performance for that specific interval. Therefore, only the accounting period allows for a one-to-one comparison. The question of whether a company has suffered losses or reaped profits is shrouded in ambiguity when a specific time frame is not assigned. However, by implementing the concept of fixed intervals for reporting, financial statements become imbued with significance, empowering investors to meticulously scrutinize and interpret financial outcomes.