Which concept states that the life of a business can be divided into equal time periods?

What is the Accounting Period Concept?

Accounting period concept is based on the theory that all accounting transactions of a business should be divided into equal time periods, which are referred to as accounting periods.

The purpose of such a time period is that financial statements can be prepared and presented to the investors and also help in comparing performance of the business with each time period.

By preparing financial statements within a particular time period, a company is able to determine the profit and loss that occurred during the period for the business.

The lack of a proper accounting period will result in variation of results and makes it difficult to determine the financial position of the company at that time.

Generally an accounting period is of 12 months (1 year). While the time period is fixed, the month can vary from company to company.

Types of Accounting Period in Accounting

The following types of accounting period can be seen in accounting:

1. Calendar Year

2. Fiscal Year

Calendar Year: The companies that follow the calendar year, their accounting period starts from 1st January to 31st December of the same year.

Fiscal Year: For companies that follow the fiscal year, the accounting period starts from the first day of any other month apart from January.

Advantages of Accounting period concept

Following are some of the advantages of the accounting period concept

1. It is helpful in preparing financial statements that show the financial position of the business for a fixed time period.

2. Financial data pertaining to two accounting periods can be compared.

3. Investors can check the progress or decline of the company by referring to the trends of financial data over time periods.

Disadvantages of Accounting period concept

Following are a few disadvantages of the accounting period concept:

1. For different tax periods, there is a need for maintaining two separate accounts.

2.Comparison of two financial periods does not take into account the factual reasons that are behind the observed differences between the periods.

This concludes the topic of Accounting Period Concept, which is an important topic of Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

The time period principle (or time period assumption) is an accounting principle which states that a business should report their financial statements appropriate to a specific time period.

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In financial terms, a time period is often referred to as the accounting year, or accounting and reporting time periods. These periods can be quarterly, half yearly, annually, or any other interval depending on the business’ and owners’ preference.

The time period concept is one of the fundamental accounting principles and rules, applicable to both cash accounting and accrual accounting.

The importance of time period principle

The financial statements of any business tell a story of the business’s activities and their position at a certain point in time. Therefore, the importance of the time period principle is to inform any readers about the time period for which the financial statements have been prepared.

The general concept of the time period principle assumes that all businesses can divide their financial activities into artificial time periods. In other words, all revenues and expenses can be systematically assigned to distinctive and consecutive accounting time periods.

However, not all transactions can easily be assigned to a specific time period. In these cases, the transactions and the period need to be estimated to a specific time period. An example of this is depreciation for equipment expenses, which depends on the estimated number of years which the fixed asset will be functioning and in use.

The time period principle and your accounting

The time period principle allows for your accountant to measure your business performance. If you do not divide time into specific periods, it will be difficult for your accountant to separate transactions that occurred in different time periods. Furthermore, if your business transactions are not recorded in different time periods, it will not be possible to compare transactions against each other, or to measure the business position and other financial aspects.

Which financial statements are we talking about?

When we talk about preparing and recording the financial statements appropriate to a specific time period, we are talking about income statements, balance sheets, statement of cash flows, and statement of changes in equity.

The time period principle and other accounting principles

Just like the time period principle, there are a few other accounting principles with are also concerned with income measurement assumptions. These include the matching principle, and the going concern principle.

The matching principle states that each revenue recorded should be matched with the related expenses at the same time. In other words, for every debit there should be a corresponding credit (and vice versa). The matching principle is therefore dependant on the time period principle, since in order to allocate revenues and expenses to a specific accounting time period it is first necessary to determine the length of these accounting periods.

Another connection to the time period principle, is the going concern principle. The going concern principle states that businesses should assume they will continue to operate and exist in the foreseeable future, and not liquidate. This assumption therefore allows businesses to defer some accrued expenses to future accounting periods. In order to do so, the an accounting period needs to be defined, which is where the time period principle comes in.

Debitoor and the time period principle

Debitoor invoicing software aims to help you comply with accounting principles by using an automated system to match your transactions as easily and quickly as possible. One of the features in our larger subscription plans allows you to upload your bank statements which will automatically match each payment to the corresponding invoice or expense.