Accounting Period Concept | Types, Advantages and Limitations

What is Accounting Period Concept?

Accounting period concept tells the business to record all the transactions for a given accounting period for recording and analysis. Accounting period concept states that all the transactions that occur in a business should be divided into periods. This concept helps in the determination of profit and loss of a particular period and its comparison with the previous year and forecasting the figures for next years. An accounting period can be weeks, months, quarters, or even years.

Geeky Takeaways:

• The purpose of stating an accounting period is to report financial statements to the stakeholders for an informed decision-making process.
• The comparison between the current year and previous years can be made, and the figures for the next accounting years can be forecasted.
• Accounting period concept helps in determining the financial position of the company during a specific period.

Types of Accounting Periods

Accounting Periods can be of two types, Calendar year and Fiscal year. The two are explained below,

1. Calendar year consists of a year starting from the first day of January and ending on the last day of December.

2. Fiscal year consists of a year starting from the first day of April and ending on the last day of March of the next year.

Requirements of Accounting Period

1. Accrual Method of Accounting: This method of accounting is a must in the accounting period concept. Accrual method of accounting tells the business to record the expenses and revenues as and when they occur and not necessarily when the monetary transactions happen concerning them. The focus of this method of accounting is to record the transactions irrespective of the time of monetary exchange.

2. Matching Principle: The matching concept states that an organisation should recognise its expenses in the same financial year if the expense is related to the revenue of that year. In simple words, if a firm is earning revenue in an accounting period, even though it incurs the expenses related to that revenue in the next accounting year, the expense will be realised in the same accounting year when the revenue has been realised by the firm.

Advantages of Accounting Period Concept

1. Financial Statements: Accounting Period Concept helps in the preparation of financial statements like Trading A/c, Profit and Loss A/c, Balance Sheet, Income Statements, etc.

2. Reporting & Decision-Making: Accounting Period Concept helps in reporting the financial statements to all the stakeholders for a specified period and/or in chronological order so that investors and the board of directors can make informed decisions.

3. Comparison: The comparison between the current year and previous years can be made and the figures for the next accounting years can be forecasted.

4. Financial Health: Accounting period concept helps in determining the financial position of the company during a specific period. Potential investors can analyse the health of the company before investing.

Limitations of Accounting Period Concept

1. Inconsistent Reporting: Accounting Period can vary from company to company and sometimes within the company. Reporting of financial statements by following different accounting periods may not be very useful.

2. Ineffective Comparison: Following different accounting periods will not be very useful for the comparison of figures.

3. Manipulation: Companies can manipulate accounts by following inconsistent accounting periods and get the desired financial results.

4. Different Tax Periods: If the tax period is different, maintenance of two different accounts will be required which can be burdensome.