What Is an Accounting Period?
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.
- An accounting period is a period of time that covers certain accounting functions, which can be either a calendar or fiscal year, but also a week, month, or quarter, etc.
- Accounting periods are created for reporting and analyzing purposes, and the accrual method of accounting allows for consistent reporting.
- The matching principle states that expenses should be reported in the accounting period in which the expense was incurred, and all revenue earned as a result of that expense be reported in the same accounting period.
How an Accounting Period Works
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 an entire calendar year.
Accounting Period Types
A calendar year with 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 on March 31 of the following year.
Financial statements cover accounting periods, such as the income statement and balance sheet. The income statement lays out the accounting period in the header, such as “...for the year ended Dec. 31, 2019.” Meanwhile, balance sheets cover a point in time, i.e. the end of the accounting period.
Requirements for 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.
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 is reported in the same accounting period. For example, the period for 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.