Time period concept

From CEOpedia | Management online

Time period concept (also called the accounting period [1]) is one of the three basic accounting principles among going concern and consistency and accruals [2]. Time period concept divides life of business into periods of time (called also intervals) that concerns financial information. There are two basic concepts here [3]:

  • Fiscal year - 12 months of accounting period when books are closed another day than 31th of December,.
  • Calendar year - 12 months of accounting period when books are closed 31th of December each year (if books are closed 31th of December, fiscal year and calendar year are covering each other).

Importance of time period concept for stakeholders

Investors, creditors, bankers, owners and managers use information from accounting periods to access if business has success or failure, in other words - if economic objectives are met or not. Stakeholders are informed regularly - usually monthly, quarterly or annually[4].

Which documents refers to time period concept

The time period concept refers to many documentation used in the company. Based on that records, management raises discussions, and as a result of that operations might be analyzed and economic decision taken. Also paying taxes would be done slightly differently for fiscal year method and calendar year method, however total amount of taxes always remains the same [5]. Documents that refer to time period concepts are mainly financial statements such as [6]:

  • the balance sheet,
  • an income statement,
  • the cash flow statement.

Calendar year versus fiscal year

Usually enterprises can choose more advantageous accounting approach for them: calendar year or fiscal year. There might be different situation with partnerships or limited liability companies where governmental tax policies sometimes determine fact that calendar year accounting policy should be used. Many companies end fiscal year in other months than December which might have reason in seasonality. Below are some examples of branch of companies and their end of fiscal year [7]:

  • January: auto accessories, department stores or hardware stores,
  • February: building contractors, plumbing suppliers,
  • March: warehouses,
  • June: appliances, books, building supplies, furniture, groceries, office equipment, papers, ski shops,
  • September: electrical equipment, garages, real estate agencies.

Examples of Time period concept

  • The time period concept is a basic accounting principle that states that financial statements should be prepared for a specific period of time. This helps in understanding the performance of a company over a period of time.
  • For example, a company may want to compare its performance in the second quarter of 2019 to the same period in 2018. This is where the time period concept comes into play. By analyzing the financial statements for both periods, the company can determine how it has performed over that time.
  • Another example of the time period concept is when a company is preparing its annual financial statements. The company will need to analyze its financial performance over the entire fiscal year, which could be from January to December. By analyzing the financial statements from the beginning of the year to the end, the company can determine if there have been improvements or declines in its financial performance.

Advantages of Time period concept

The Time period concept (also called the accounting period) is the basis for the preparation of financial statements. It is the period over which financial performance is measured. The following are the advantages of this concept:

  • It allows for the comparison of financial position and performance of a business across different accounting periods. This makes it easier to identify any changes or trends in the business’s performance.
  • It helps to provide a more accurate picture of a business’s financial position as it takes into account transactions that have taken place over a certain period of time.
  • It enables businesses to set budgets and goals on a regular basis and measure their performance against these goals.
  • It allows businesses to make necessary adjustments to their policies and procedures to ensure they are meeting their targets.
  • It helps businesses to be more organized and efficient in the way they manage their financial affairs. It also assists in managing cash flows and helps to reduce the risk of fraud and other irregularities.

Limitations of Time period concept

The Time Period Concept (also known as the Accounting Period) is a basic concept of accounting which states that a business should report its financial performance over a certain period of time. This period, known as a fiscal period, is usually a year but can be a quarter or even a month. There are several limitations to this concept. These include:

  • The time period concept assumes that the business environment is static and that conditions do not change during the period. However, this is not always the case as the economic environment can change significantly over a year, quarter, or month.
  • The concept also assumes that the financial performance of the business is consistent and that the data is accurate and reliable. This is not always the case as fluctuations in the market and external factors can affect the figures.
  • The concept also fails to take into account the long-term implications of certain decisions and activities, as the results may not be seen until after the time period has ended.
  • In addition, the concept fails to account for changes in the value of money which can result in different values being reported over two different periods. This can cause discrepancies in the reported figures.

Other approaches related to Time period concept

The Time period concept (also called the accounting period) is an important concept in financial accounting that requires the financial statements of an entity to be prepared for a specific period of time. Other approaches related to this concept include:

  • Accrual Basis Accounting: This approach requires transactions to be recorded when they occur, not when cash is exchanged. This allows for the matching of revenues and expenses to the period in which they occurred.
  • Going Concern Concept: This concept assumes that the entity will remain in operation for the foreseeable future, allowing for the deferral of certain expenses or revenues that would otherwise be recorded in the current period.
  • Consistency Concept: This concept requires the entity to use the same accounting methods from one period to the next, allowing for a more accurate comparison of financial statements from one period to the next.
  • Materiality Concept: This concept allows for the omission of certain transactions that are not material to the financial statements.

In summary, the Time period concept is an important concept in financial accounting that involves the preparation of financial statements for a specific period of time. Other approaches that are related to this concept include Accrual Basis Accounting, Going Concern Concept, Consistency Concept, and Materiality Concept.

Footnotes

  1. ↑ Allen J. E. (2004), p. 204
  2. ↑ Valneva, (2015), p. 13
  3. ↑ Albrecht W., Stice J., Stice E., Swain M.(2007), p. 132
  4. ↑ Albrecht W., Stice J., Stice E., Swain M.(2007), p. 132
  5. ↑ Weltman B. (2010)
  6. ↑ Albrecht W., Stice J., Stice E., Swain M.(2007), p. 131
  7. ↑ Weltman B. (2010)


Time period concept — recommended articles
Periodicity concept — Comparative statements — Opening balance — Cost principle — Interim Statement — Accounting Convention — Accrual method — Exceptional Item — Opening balance sheet

References

Author: Jolanta Lesnicka

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