Accounting Concepts Meaning, Conventions, Principles, and FAQs

The accounting books are kept separated from the books of the business owners. In financial accounting the accounting period is determined by regulation and is usually 12 months. The beginning of the accounting period differs according to jurisdiction. For example, one entity may follow the calendar year, January to December, while another may follow April to March as the accounting period. Accounting period provides business owners the perspective about the profitability of the business on an ongoing basis and helps them make informed business decisions. To enable this, the accountants have developed the periodicity concept.

The calendar runs from January 1st to December 31st, and this 12-month natural progression is followed by an accounting period. Accounting periods are created for reporting and analytical purposes, and accrual accounting allows consistent reporting. Income statements for management are therefore prepared more frequently. The most common period is a month, but the period may be as short as a week or even a day. Accruals are revenues earned or expenses incurred which impact a company’s net income, although cash has not yet exchanged hands.

The money measurement concept assumes that the business transactions are made in terms of money i.e. in the currency of a country. Hence, as per the money measurement concept, transactions that can be expressed in terms of money should be recorded in books of accounts. For example, the sale of goods worth Rs. 10000, purchase of raw material Rs. 5000, rent paid Rs.2000 are expressed in terms of money, hence these transactions can be recorded in the books of accounts. For a given period, an accounting period can portray the company’s financial status accurately. When comparing the financial data of two or more periods can be helpful.

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This enables companies to present a true and fair view of the financial statements. This concept assumes that the organization and business owners are two independent entities. Hence, the business translation and personal transaction of its owner are different. For example, when the business owner invests his money in the business, it is account period concept recorded as a liability of the business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as a business expense. Thus, the accounting transactions are recorded in the books of accounts from the organization’s point of view and not the person owning the business.

This is the most common calendar structure for especially in the retail and manufacturing industries. With each quarter having thirteen weeks that are grouped into one 5-week month and the other two 4-week months. Generally, the accounting period follows this Gregorian calendar year which consists of twelve months.

Most businesses choose a default duration of one year, although this does not have to be a calendar year to be effective. The accounting periods of many firms with odd fiscal year ends begin and end in the middle of a calendar year. It is the most typical calendar format, particularly in retail and manufacturing. A year is divided into four halves according to the calendars, and each quarter consists of 13 weeks divided into a five-week months and two four-week months. This data is essential for business owners, investors, creditors, and government agencies.

Accounting Period Concept FAQs

The accounting Period is generally after every three, six, or twelve months. The accounting period maximum times coincides with the business’s fiscal year. There are other business entities that follow the accounting period of three or six months. The accountants use this concept when there is a significant concern regarding the liquidation of the assets. The going concern concept is applied when the chances are high that the company would be liquidated in the next two or four quarters.

This means that, regardless of when the actual transaction is made, the expenses that are entered into the debit side of the accounts should have a corresponding credit entry in the same period. Financial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.

Here, the accounting period is that of half-year, i.e., 1st January to 30th June, and the next period shall be from 1st July to 31st December. In this time frame, a business prepares its own financial statements and reports the financial performance and position of its business to the external or the interested stakeholders. The matching concept refers to reporting of the revenues and expenses in the same time period.

Accounting Period: Explanation

To determine the profit or loss of a firm, and to ascertain its financial position, profit & loss accounts and balance sheets are prepared at regular intervals of time, usually at the end of each year. The purpose of having an accounting period is to take corrective measures keeping in view the past performances, to nullify the effect of seasonal changes, to pay taxes, etc. Using this idea, ongoing and complicated business activities are separated into short periods and reported in monthly quarterly and yearly financial statements. The company creates and publishes a financial account for each period. This data is helpful to business owners, investors, creditors, and government agencies. The period assumption provides stakeholders with reliable and relevant financial information to make timely business choices.

At the time of service or upon transferring a good to the customer, the company will recognize both revenue and an accounts receivable. 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 , although the entity may also wish to aggregate accounting data by quarter , half year , or an entire fiscal year. Using this concept, the business’ ongoing and complex undertakings are divided into short time periods and reported in monthly, quarterly and annual financial statements. For each time period, the business prepares and publishes financial statements.

Most of the corporate has to provide annual report to the shareholders as well as income tax reporting on annual basis. In most of the businesses, the accounting https://1investing.in/ year or fiscal year corresponds to the calendar year. But there are many businesses use the natural business year instead of the calendar year.

Each quarter has thirteen weeks which are grouped into one 5-week month and two 4-week months. Usually, the accounting period follows the Gregorian calendar year that consists of twelve months starting from January 1 to December 31. It improves the quality of financial statements and reports concerning the understandability, reliability, relevance, and comparability of such financial statements and reports.

• This indicates the accounting period is the month , although the entity may also wish to aggregate accounting data by quarter , half year , or an entire fiscal year.
• Usually, when keeping books, accountants do not think that the businesses would soon be bankrupt or be liquidated; this allows the accountants to put a price on assets that can be correct for a long time.
• In contrast to the comprehensive view of spending when an item is paid, this payment identification allows for relative comparisons over several billing periods.
• If a company were to expense an expensive machine in the year of purchase, it still has a long time to generate revenues for the business.

4- or 5-week fiscal months such as the 4 weeks ending the last Saturday of February, etc. 13-week fiscal quarters such as the 13 weeks ending on the last Saturday in April, etc. It means the collection of cash and payment in cash is ignored while calculating the profit or loss of the year. While the true profit or loss of a business can only be determined when the business finally closes down, it is clearly unwise to wait that long before learning about its financial health. The dual concept implies that every transaction has a similar effect on assets and liabilities in such a way that the value of total assets is always equal to the value of total liabilities. When comparing outcomes from one era to the next, the underlying facts that caused the discrepancies are ignored.

This information is significant for business owners, investors, creditors and government agencies. The time period assumption provides the stakeholders with the reliable and relevant financial information to make reliable business decisions in a timely manner. Financial ReportFinancial reporting is a systematic process of recording and representing a company’s financial data.

What Does Accounting Concepts Mean?

In management accounting the accounting period varies widely and is determined by management. The cost concept stops any kind of manipulation while taking into account the net realizable value or the market value. On the downside, this concept ignores the effect of inflation in the market, which can sometimes be very steep. Still, the cost concept is widely and universally accepted on the basis of which we do the accounting of a business unit.

The accounting period is usually three, six, or twelve months, and other corporate entities adhere to a three or six-month accounting period. For internal purposes, the accounting period is assumed to be one month or one quarter, even though externally, the accounting period is twelve months. Instead of an entire year, the International Financial Reporting Standards allow 52 weeks, referred to as the financial year as an accounting term. At the end of an accounting period, a company will close out the period.