What is the meaning of accounting periods? The accounting period principle divides an organisation’s lifetime into shorter periods so that its performance can be monitored on a regular basis. Company accounting is based on the Going Concern Principle, which means that the company will continue to operate for the foreseeable future. Users of financial statements, especially management and banks, need to prepare financial statements on a regular basis in order to make timely decisions. Management regularly seeks information to analyse performance and resource needs (short-term and long-term). Banks are investing money and need to ensure safety and returns, so they request accounting information on a regular basis. Similarly, the government must investigate the company’s tax obligations. What are accounting periods? From the above, the life of a company is divided into smaller periods (usually one year) called accounting periods. As per the income tax act, the accounting year period is from 1st April to 31st March. The accounting year starts on April 1st and the accounting year ends on March 31st.
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During the accounting period, accounting cycles are used to evaluate, collect, classify, summarise, and report financial data. The standard accounting period is 12 months. On the other hand, the start of the accounting period varies from organisation to organisation. Some companies may use the regular calendar year (January to December) as their fiscal year, while others may use the fiscal period (April to March).
What Is an Accounting Period?
In general, the accounting year refers to the assessee’s financial year or prior year, which is 12 months long. An accounting cycle is a series of processes for analysing, recording, classifying, summarising, and reporting financial data to create a financial report. Some processes run at the beginning of the billing period, and others run towards the end of the billing period. The accounting period begins when the books are balanced, and the accounting department prepares the annual financial statements. The accounting period for financial accounting is usually 12 months and is stipulated by law. The start of the accounting period depends on your jurisdiction. For example, one company may use a calendar year (January to December), and another company may use an accounting period (April to March).
Previously, an assessee could choose any 12-month period he wanted as his accounting years, such as Diwali, calendar, or financial year. All Indian taxpayers must now show their income for income tax reasons based on the 12-month accounting year beginning on April 1st and ending on March 31st, referred to as the financial year, under the rules of the Income Tax Law. This accounting year or financial year is also known as the assessee’s “prior year” in technical terms of the income tax law.
Also Read: Fundamentals of Accounting – Learn About Accounting Process and Steps & Basic Features of Accounting
How Does an Accounting Period Work?
In many cases, multiple accounting periods apply at any time. For example, a company can close its June books. Even if your organisation aggregates billing data quarterly (April to June), half (January to June), and calendar year (June), the billing period is months. Accounting periods are time frames that include specific accounting activities. It can be a week, month, or quarter, as well as a calendar year or fiscal year. Accounting periods are used to report and analyse data, and accrual accounting methods ensure consistency.
Accounting Period Types
In accounting, the following sorts of accounting periods can be seen:
1. Calendar Year
2. The Fiscal Year
3. 4–4–5 Calendar Year
Calendar Year:
In most cases, the accounting period corresponds to the twelve-month Gregorian calendar year. The month runs from the 1st of January to the 31st of December. This natural sequence of these 12 months is followed by the accounting period.
The Fiscal Year:
The accounting period for organisations that follow the fiscal year begins on the first day of any other month other than January.
4–4–5 Calendar Year:
This is the most widely used calendar structure, particularly in the retail and manufacturing industries. A year is divided into four halves in the 4–4–5 calendar, and each quarter consists of thirteen weeks divided into one five-week month and two four-week months.
For business owners, investors, creditors, and government authorities, this information is critical. The time period assumption provides stakeholders with accurate and timely financial data, allowing them to make informed business decisions.
This accounting period is chosen based on the business needs and conditions, which may be too complicated to warrant other accounting periods.
Also Read: Different Types of Accounts in Accounting – 3 Types of Accounts
Requirements for Accounting Periods
The accounting period is set for reporting and analysis. Theoretically, companies want to keep growth constant over the long term to show stability and a long-term earnings outlook. The accounting strategy that supports this concept is the accrual accounting method. Accrual accounting requires input regardless of when the monetary component of an economic transaction occurs. For example, accrual accounting requires fixed assets to be depreciated over their useful life. This identification of costs over multiple accounting periods allows for relative comparisons rather than a comprehensive statement of costs when an item is paid.
Conclusion
In this article, we learned in-depth about the accounting period as per income tax. The accounting period in financial accounting usually is 12 months and is defined by regulation. The start of the accounting period varies depending on the jurisdiction. For example, one entity may use the calendar year (January to December), while another may use the accounting period (April to March). Instead of 12 months, the International Financial Reporting Standards allow for a 52-week accounting cycle. Also, we saw the types of the accounting period. Knowing about the requirements of accounting periods is also very important. The accrual method of accounting is the accounting approach that supports this premise. Regardless of when the monetary portion of an economic transaction happens, the accrual method of accounting requires an accounting entry to be made.
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