What is an Accounting Period?
Definition: An accounting period, also called a reporting period, is the amount of time covered by the financial statements. In other words, it’s the time frame of activities that are summarized in the financials. Most general-purpose financial statements include business activities over the course of a year, but some interim statements are created for quarters and mid-year reporting requirements making their reporting periods less than on year.
An accounting period is the period for which books are balanced and the financial statements are prepared. Generally, the accounting period consists of 12 months. However the beginning of the accounting period differs according to the jurisdiction. For example, one entity may follow the regular calendar year, i.e. January to December as the accounting year, while another entity may follow April to March as the accounting period.
The International Financial Reporting Standards allow a period of 52 weeks as an accounting period instead of a proper year. This method is known as the 4-4-5 calendar in British and Commonwealth usage and the 52–53-week fiscal year in the United States. In the United States the method is permitted by generally accepted accounting principles, as well as by US Internal Revenue Code Regulation 1.441-2 (IRS Publication 538).
In some of the ERP tools there are more than 12 accounting periods in a financial year. They put one accounting period as “Year Open” period where all the carried over balances from last financial year are cleared and one period as “Year Close” where all the transactions for closed for the same financial year. Accounting is an art of recording classifying and summarising the financial positions of the company. It is done by the accountant.
What Does Accounting Period Mean?
An accounting period is an established range of time during which accounting functions are performed, aggregated, and analyzed including a calendar year or fiscal year. The accounting period is useful in investing because potential shareholders analyze a company’s performance through its financial statements that are based on a fixed accounting period.
You can also think of an accounting period as the amount of time it takes to complete one accounting cycle. Since the purpose of a cycle is to record transactions over a period of time and report them in the form of financials, it only makes sense the one cycle equals one period. The accounting cycle opens the 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. Then financial statements are prepared and the next accounting period begins.
An accounting period is the period of time covered by a company’s financial statements. Common accounting periods for external financial statements include the calendar year (January 1 through December 31) and the calendar quarter (January 1 through March 31, April 1 through June 30, July 1 through September 30, October 1 through December 31). It is common for these companies to also have monthly accounting periods. However, the financial statements for the monthly accounting periods are likely to be used only by the companies’ managements.
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. Its quarterly accounting periods would be July 1 through September 30, etc.
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.
Most companies use one year as their default period, but this doesn’t have to be one calendar year. Many companies with odd fiscal year-ends open and close their accounting periods in the middle of a calendar year. For example, a company with a June fiscal year would start its period on June 1 and end it on May 31 of the following year.
An accounting period can really be any length of time, however. It’s just that one year is a natural period. The time frame isn’t what defines a reporting period. The issuance of financial statements and the time frame that the statements report in are what defines the length of the period.
For example, public companies that are required to issue quarterly financial statements have three month reporting periods. Traditional annual statements report on 12-month accounting periods. There is no standard set reporting period. It’s simply the length of time the financials cover.
The following are some examples of accounting periods used by U.S. companies:
- Annual calendar year of January 1 through December 31.
- Annual fiscal year such as July 1, 2019 through June 30, 2020; April 1, 2019 through March 31, 2020; etc.
- 52- or 53-week fiscal year such as the 52 or 53 weeks ending on the last Saturday of January, etc.
- Calendar quarters such as January 1 through March 31, April 1 through June 30, etc.
- Fiscal quarters such as May 1 through July 31, August 1 through October 31, etc.
13-week fiscal quarters such as the 13 weeks ending on the last Saturday in April, etc.
- Calendar months such as March 1 through March 31, November 1 through November 30, etc.
- 4- or 5-week fiscal months such as the 4 weeks ending the last Saturday of February, etc.
For corporation tax purposes, an accounting period begins when the company enters the charge to corporation tax (for example, by beginning to carry on business or becoming UK resident) or (if the company is already within the charge to corporation tax) immediately after the end of the previous accounting period. (Section 9, Corporation Tax Act 2009.)
An accounting period ends when the first of the following occurs:
- 12 months have passed since the beginning of the accounting period.
- An accounting date (to which point the company draws up its accounts).
- The end of a period for which the company does not make up accounts.
- The company beginning or ceasing to trade.
- The company beginning or ceasing to be within the charge to corporation tax in relation to its sole trade or all of its trades.
- The company beginning or ceasing to be UK resident.
- The company ceasing to be within the charge to corporation tax.
- The company entering or ceasing to be in administration.
Fiscal Year vs. Calendar Year
Accounting Period is an economic term that refers to the period for which an entity prepares its financial statements. It is a continuous period of twelve consecutive months, unless stated otherwise. Individual accounting periods must be consecutive, i.e. follow one after another.
There are two kinds of accounting periods:
- Calendar Year – the accounting period begins on January 1 and ends on December 31 of the same year
- Fiscal Year – the accounting period begins on the first day of any month other than January
A calendar year in respect to accounting periods indicates 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. This annual accounting period imitates a basic twelve-month calendar period. An entity may also elect to report financial data through the use of a fiscal year. 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 March 31 of the following year.
Why Is an Accounting Period Important?
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.
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. The time period of the financial statement is shown in its heading.
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.
The choice of accounting period depends on the business needs and circumstances which might be complex enough to warrant different accounting periods. All businesses are allowed to define as many periods as they want as long as they meet legal requirements.