What is an 'Accounting Period'

An accounting period is an established range of time in 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 the company’s performance through its financial statements that are based on a fixed accounting period.

BREAKING DOWN 'Accounting Period'

There are typically multiple accounting periods currently active at any given point in time. For example, an entity may be 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 (January through June) and entire calendar year.

Fiscal Year vs. Calendar Year

A calendar year in respect to accounting periods indicates an entity begins aggregating accounting records at the beginning of January and subsequently stops the accumulation of data at the end of December. This annual accounting period imitates a basic twelve-month calendar. 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.

Consistency Across Accounting Periods

Accounting periods are established for reporting and analysis purposes. In theory, an entity wishes to experience consistency in growth across accounting periods to display stability and an outlook of long-term profitability. The method of accounting that supports this theory is the accrual method of accounting. The accrual method of accounting requires an accounting entry to be made when an economic event occurs regardless of the timing of the cash element in the event. For example, the accrual method of accounting requires the depreciation of a fixed asset over the life of the asset. This recognition of an expense over numerous accounting periods enables relative comparability across this period as opposed to a complete reporting of expenses when the item was paid for.

The Matching Principle

A primary accounting rule relating to the use of an accounting period is the matching principle. The matching principle requires that expenses are reported in the accounting period in which the expense was incurred and all associated revenue earned as a result of that expense are reported in the same accounting period. For example, the period in which the cost of goods sold is reported will be the same period in which the revenue is reported for the same goods. The matching principle dictates that financial data reported in one accounting period should be as complete as possible and all financial data should not be spread across multiple accounting periods.

RELATED TERMS
  1. Cash Accounting

    An accounting method where receipts are recorded during the period ...
  2. Financial Accounting

    The process of recording, summarizing and reporting the myriad ...
  3. Allowance For Doubtful Accounts

    A contra-asset account that records the portion of a company's ...
  4. Accounting

    The systematic and comprehensive recording of financial transactions ...
  5. Chart Of Accounts

    A listing of each account a company owns, along with the account ...
  6. Accrual Accounting

    Accrual accounting is an accounting method that measures the ...
Related Articles
  1. Financial Advisor

    Financial Accounting

    Financial accounting is the process of gathering, recording, summarizing and reporting financial data relating to a business. The ultimate goal is to accurately report the financial picture and ...
  2. Personal Finance

    Accountant: Job Description & Average Salary

    Discover what the job description of an accountant entails, along with education and training, salary and skills necessary for success.
  3. Investing

    What Is A Trading Account?

    A trading account enables an investor to buy and sell securities.
  4. Personal Finance

    What is an Account Balance?

    An account balance represents the total amount of money in a financial account at any given moment.
  5. Personal Finance

    Career Advice: Financial Analyst Vs. Accountant

    Read an in-depth comparison between a career as a financial analyst and a career as an accountant, including how to determine which is best for you.
  6. Managing Wealth

    Accounting Research Manager: Job Description & Average Salary

    Learn about the average salary of an accounting research manager as well as the necessary skills, experience and education, and licenses to hold this position.
  7. Personal Finance

    Understanding Savings Accounts

    A deposit account held at a bank or other financial institution that provides principal security and a modest interest rate.
  8. Investing

    What is Accounting?

    Accounting is the recording of financial transactions of a business or organization. It also includes the process of summarizing, analyzing and reporting these transactions in financial statements.
  9. Personal Finance

    Handling High-Yield Savings Accounts

    Is this the savings route for you? Read on to find out what these accounts have to offer.
RELATED FAQS
  1. When is accrual accounting more useful than cash accounting?

    Learn when accrual accounting is more useful than cash accounting when trying to determine a company's performance over a ... Read Answer >>
  2. When are expenses and revenues counted in accrual accounting?

    Take an in-depth look at the treatment of revenues and expenses within the accrual method of accounting and learn why many ... Read Answer >>
  3. What is the difference between accrual accounting and cash accounting?

    Understand the differences between the two basic methods of accounting commonly used by businesses: cash accounting and accrual ... Read Answer >>
  4. What is accrual accounting used for in finance?

    Read about the accrual method of accounting, its uses and rules, and why it is considered so important for investors, lenders ... Read Answer >>
  5. What are the differences between a change in accounting principle and a change in ...

    Learn how to differentiate between a change in accounting principle and a change in accounting estimate and how accountants ... Read Answer >>
  6. What is the difference between accrual accounting and accounts payable?

    Understand the difference between accrual accounting, an accounting method, and accounts payable, which is a ledger entry ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center