What is an Accounting Period?

ByMunyaradzi Mafaro

An accounting period is the period covered by a set of financial statements. Companies use account periods to report their financial performance and position regularly. This allows the company, investors, regulators, and other stakeholders to analyze the business’s economic health and track changes over time.

Common Account Periods

The most common account periods are monthly, quarterly, and yearly:

  • Monthly account periods start on the first day of the month and end on the last day of that month.
  • Quarterly account periods cover three months. The four quarters are often based on the calendar year, so Quarter 1 (Q1) is January to March, Q2 is April to June, Q3 is July to September, and Q4 is October to December.
  • Annual account periods usually align with the calendar year (January 1 to December 31). However, some companies use a fiscal year that differs from the calendar year. For example, a company might have a fiscal year from October 1 to September 30.

The choice of account period depends on many factors, including legal requirements, industry norms, and internal reporting needs. Public companies must file quarterly and annual reports. Private companies have more flexibility but still need timely financial information to make business decisions.

Elements of an Account Period

An account period has a start date and an end date. The company records all financial transactions during that timeframe. Key elements include:

Revenues

Revenues are the money earned from selling products or services. Companies record revenues when earned, even if payment has not yet been received. For example, if a company sells $10,000 worth of goods on credit in January, that $10,000 is January revenue, even if the customer does not pay until February.

Expenses

Expenses are the costs incurred to generate revenues. They include salaries, rent, utilities, raw materials, advertising, and asset depreciation. Under the matching principle, companies record expenses in the same period as the related revenues. So, if a company pays $5,000 for a magazine ad in March to promote sales in April, that $5,000 is an April expense.

Accruals and Deferrals

Accrual accounting requires companies to record transactions in the period they occur, regardless of when money changes hands. At the end of the account period, accountants make adjusting entries for:

  • Accrued revenues: Money earned but not yet received or recorded
  • Accrued expenses: Costs incurred but not yet paid or recorded
  • Deferred revenues: Money received but not yet earned
  • Deferred expenses: Costs paid but not yet incurred

These adjustments ensure that the financial statements accurately reflect the revenues and costs for the period.

Financial Statements

At the end of the account period, the company prepares financial statements to summarize its financial performance and position:

  • An income statement shows the period’s revenues, expenses, and profit or loss.
  • A balance sheet lists assets, liabilities, and owner’s equity at the end of the period.
  • A cash flow statement shows changes in cash during the period from operating, investing, and financing activities.

Publicly traded companies must file quarterly (10-Q) and yearly financial statements (10-K). Private companies might prepare them monthly or annually for internal use and tax purposes.

Importance of Account Periods

Consistently and accurately tracking account periods is essential because:

Performance Evaluation

Comparing financial results across periods shows whether the company’s performance is improving or worsening. Trends in revenues, expenses, and profits help managers decide pricing, cost control, and investment. Comparisons are only valid if each period follows the same accounting rules.

Budgeting and Forecasting

Companies use past performance to plan for the future. Historical financial data by account period is the basis for budgets and forecasts. Managers look at what happened in prior periods to predict demand, set targets, and allocate resources for upcoming periods. Larger companies may begin the annual budgeting process 3-6 months before the start of the next fiscal year.

External Reporting

Laws and regulations require companies to provide periodic financial reports to investors, creditors, and government agencies. For example, U.S. public companies must file audited annual reports (10-K) and unaudited quarterly reports (10-Q) with the Securities and Exchange Commission (SEC). These reports give external stakeholders a regular look at the company’s financial health and risks.

Tax Compliance

Companies must also file tax returns based on the income and expenses reported in their financial statements. U.S. C corporations file annual returns using IRS Form 1120. The tax year can be a calendar year or a fiscal year. Some companies use a 52-53-week tax year. This method ends the tax year on the same day of the week, such as the last Friday in December. Using consistent account periods makes tax compliance more manageable.

Special Considerations

Companies can face challenges and complexities with account periods:

Seasonality

Some businesses earn most of their revenues in certain seasons. Examples include retailers that rely on holiday shopping, farmers that harvest crops once per year, and tourist destinations with specific peak periods. These companies may have significant variations in quarterly results. Annual reports give a more complete picture of performance.

Accounting Changes

Sometimes, companies change the timing or measurement of revenues and expenses. For example, a subscription business might switch from recording revenues when payments are received to recording them over the life of the subscription. These changes require adjustments to prior-period financial statements so results are comparable. Accounting standards have specific rules for making and reporting such changes.

Mergers and Acquisitions

When companies combine, their account periods may not align. The acquiring company must adjust its financial statements to match its reporting periods and accounting policies. This can involve complex calculations and judgments. Companies must also decide whether and how to combine prior period results for comparison purposes.

To Round off

An accounting period is a fundamental building block of financial reporting. It provides a consistent and comparable way to track a company’s revenues, expenses, and profitability over time. Managers use account period data to monitor performance, plan for the future, and report to stakeholders. Although some companies have unique challenges, all must carefully consider the choice of account periods and apply consistent accounting rules. Financial statements can provide valuable insights into a company’s economic health and prospects with proper attention to account periods.

Munyaradzi Mafaro is a music enthusiast and he also likes to tackle topics of business, productivity, and the possibilities for growth in the digital world.