Periodicity concept
| Periodicity concept |
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| See also |
The periodicity concept, can be also called the time interval concept, is a period during which business enterprises are required to prepare financial statement at specified intervals. Under this concept periodicity concept are generated over relatively short periods of time for example, a year or a quarter, so that performances can be measured and compared to each other's [1].
This statement requires the company to have a profit and loss account and a balance sheet prepared at regular intervals to identify information about the business unit for all shortcomings in performance evaluation, tax calculations, budget control and the like. Determining the income of a period leads to a comparison of the results of subsequent periods[2]. The periodicity concept are specific to a business’ type and there are some types of business which are called „continuing profit seeking enterprises”. In this type of enterprise, enterprises last indefinitely. In such cases, accounting and reporting must be carried out periodically[3].
Example of using periodicity concept
An example of the periodicity concept in action would be a retail business preparing financial statements on a quarterly basis. The business would create a profit and loss statement and a balance sheet for each quarter of the year, and compare the results to the same period in the previous year. This would allow the business to identify trends in revenue and expenses, and make adjustments to their operations as needed. Additionally, the business could use these financial statements for budgeting, forecasting, and for tax and compliance purposes.
When to use periodicity concept?
The periodicity concept is typically used in business enterprises that operate indefinitely, also known as continuing profit-seeking enterprises. These types of businesses have a regular income stream and a long-term objective of making a profit. Examples of such businesses include companies engaged in manufacturing, trading, retail, and services. Periodic financial statements are necessary for these types of businesses to measure their performance over a certain period of time, and for the management to make informed decisions about the direction and strategy of the business. The periodicity concept is not used for non-profit organizations, not-for-profit organizations, and government organizations.
Advantages of periodicity concept
The advantages of periodicity concept are as follows[4][5]:
- The uniformity and consistency of the accounting treatment for the purposes of determining the profit and valuation of assets: The periodicity concept ensures that the same accounting principles and methods are used for the same type of transactions and events in the same period. This allows for the accurate measurement of profit and the proper valuation of assets, making the financial statements more reliable and comparable.
- Proper matching of periodical revenues and costs to the achievement of accounting objectives: By preparing financial statements at regular intervals, the periodicity concept enables the matching of revenues and costs to the period in which they were earned or incurred. This helps to ensure that the profit reported for a specific period is a true reflection of the economic performance of the business during that period.
- The comparability of financial statements for different periods is facilitated: The periodicity concept allows for the comparison of financial statements for different periods. This allows users of the financial statements, such as investors and creditors, to assess the performance and financial position of the business over time and make informed decisions.
- Financial information is accessible for user at specified time intervals: The periodicity concept ensures that financial information is made available to users at regular intervals, such as annually or quarterly. This allows users to stay informed about the business and make decisions in a timely manner.
- Through periodic evaluation, appropriate measures can be taken in a proper time: The periodicity concept enables the business to evaluate its performance on a regular basis. This allows for early identification of any issues or problems, and for appropriate measures to be taken in a timely manner to address them.
- It serves useful and reliable information for statutory and regulatory companies: The periodicity concept ensures that the financial statements are prepared in accordance with generally accepted accounting principles and legal requirements. This makes the financial statements useful and reliable for statutory and regulatory companies, such as tax authorities and securities regulators.
Disadvantages of periodicity concept
Despite advantages mentioned above, the periodicity concept results in some disadvantages which can be such as[6]:
- Usually business transactions are spread for more than only one settlement period: The periodicity concept assumes that business transactions occur within a specific period, but in reality, many transactions may span multiple periods. This can lead to difficulties in determining the appropriate period to record the transaction in, and can result in a lack of comparability between periods.
- Allocation of costs to a specific settlement period is difficult hard to manage: The periodicity concept requires that costs be allocated to the period in which they were incurred. However, this can be difficult to manage in practice, as many costs may be difficult to allocate to a specific period, resulting in arbitrary allocations. This can lead to an over or under-estimation of the profit for a period and make the financial statements less reliable.
- This concept replaces the various accounting bases and other accounting concepts, resulting in misleading financial statements: The periodicity concept can lead to the replacement of other important accounting concepts, such as the going concern concept, and the accrual basis of accounting. This can result in the financial statements being misleading and not providing a true and fair view of the financial position of the business.
Other concepts related to the periodicity concept include:
- The Going Concern Concept: This concept assumes that a business will continue to operate for the foreseeable future and that the financial statements are prepared on that basis. This is important for the periodicity concept as it allows for the preparation of financial statements on a regular basis.
- The Accrual Basis of Accounting: This concept requires that revenue and expenses be recognized in the financial statements in the period in which they are earned or incurred, regardless of when cash is received or paid. This is important for the periodicity concept as it ensures that the financial statements reflect the economic performance of the business for a specific period.
- The Materiality Concept: This concept states that only transactions and events that are material, or significant enough to affect the financial statements, should be included in the financial statements. This is important for the periodicity concept as it ensures that the financial statements are not overwhelmed with insignificant transactions and events.
- The Conservatism Concept: This concept states that in case of uncertainty or doubt, a more cautious approach should be taken in recognizing and measuring transactions and events in the financial statements. This concept is important for the periodicity concept as it ensures that the financial statements are not overly optimistic and provide a true and fair view of the financial position of the business.
Footnotes
References
- Hanif M, Mukherjee A (2013), Financial Accounting (Volume I), McGraw Hill Education, New Delhi
- Hanif M (2001), Modern Acc. Vol I, 2E, Tata McGraw-Hill Education, New Delhi
- Pendlebury M, Groves V. R, Groves R (2004), Company Accounts: Analysis, Interpretation and Understanding Sixth Edition, Cengage Learning EMEA, Andower
- Rajasekaran V, Lalitha R (2011), Financial Accounting, Pearson Education India, New Delh
- Tally Education Ltd (2018), Official Guide To Financial Accounting Using Tally.EEP 9, Fourth Revised&Updated Edition, BPB Publications, Mumbai
Author: Angelika Załęska
