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.