What is an ‘Accounting Period’
An accounting period is an established range of time in which accounting functions are performed, aggregated and analyzed including a calendar year or fiscal year. The accounting period is useful in investing because potential shareholders analyze the company’s performance through its financial statements that are based on a fixed accounting period.
BREAKING DOWN ‘Accounting Period’
There are typically multiple accounting periods currently active at any given point in time. For example, an entity may be closing the financial records for the month of June. This indicates the accounting period is the month (June), although the entity may also wish to aggregate accounting data by quarter (April through June), half (January through June) and entire calendar year.
Fiscal Year vs. Calendar Year
A calendar year in respect to accounting periods indicates an entity begins aggregating accounting records at the beginning of January and subsequently stops the accumulation of data at the end of December. This annual accounting period imitates a basic twelve-month calendar. An entity may also elect to report financial data through the use of a fiscal year. A fiscal year arbitrarily sets the beginning of the accounting period to any date and financial data is accumulated for one year from this date. For example, a fiscal year starting April 1 would end March 31 of the following year.
Consistency Across Accounting Periods
Accounting periods are established for reporting and analysis purposes. In theory, an entity wishes to experience consistency in growth across accounting periods to display stability and an outlook of long-term profitability. The method of accounting that supports this theory is the accrual method of accounting. The accrual method of accounting requires an accounting entry to be made when an economic event occurs regardless of the timing of the cash element in the event. For example, the accrual method of accounting requires the depreciation of a fixed asset over the life of the asset. This recognition of an expense over numerous accounting periods enables relative comparability across this period as opposed to a complete reporting of expenses when the item was paid for.
The Matching Principle
A primary accounting rule relating to the use of an accounting period is the matching principle. The matching principle requires that expenses are reported in the accounting period in which the expense was incurred and all associated revenue earned as a result of that expense are reported in the same accounting period. For example, the period in which the cost of goods sold is reported will be the same period in which the revenue is reported for the same goods. The matching principle dictates that financial data reported in one accounting period should be as complete as possible and all financial data should not be spread across multiple accounting periods.