Explain accounting period in finance and accounting.

Accounting period is a time frame in which, business financial activities are summarised. It can be yearly, mid-year or quarterly.

Accounting period is useful to analyse company performance through its financial statements. A public held company must report to Securities and Exchange Commission (SEC) on quarterly basis.

If the 12-month accounting period ends other on December 31st then, that period is called fiscal year. Accounting period only limited to income statement and statement of cash flows.

Advantages of accounting period are −

  • Preparation of financial statements.
  • Maintains business records.
  • Valuation of business.
  • Decision making.
  • Evidence in legal matters.

Limitations of accounting period are −

  • It measures only things/events that have a monetary value.
  • No future assessment.
  • Fails to take into considerations factors like inflation, price change etc.
  • There are no global standards in accounting policies.
  • All accounting policies are not same; confusion will arise in following.
  • Possibilities of human errors, manipulation of accounts.
  • Allocation problems.
  • Restrain of accounting principles.

Requirements of accounting periods are −

  • Consistency.
  • Matching principle.

Updated on: 12-Aug-2020


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