Why is the accounting period assumption important
As we can see, the matching principle depends on the accounting period assumption. The time period assumption enables companies to divide their economic activities into short time periods. What accounting rules and principles are being used in the accounting basis has enormous implications for financial statements, though some rules are so common as to be universal or almost universal.
Nevertheless, not all transactions can be easily assigned to a specific accounting period.
Some transactions require an estimate as well as the assumption for periodicity, which allows for a systematic allocation of expenses or revenues. For example, a depreciation expense for a given period depends on the estimate for the number of years the fixed asset will be in use.
According to the matching principlean expense of doing business is recorded in the same period as the revenue that has been generated as the result of incurring that expense. When revenues and expenses are not directly connected, they can be allocated among accounting periods in a systematic way for example: As we can see, the matching principle depends on the accounting period assumption.
Periodicity Assumption: Definition | Example | Explanation
The allocation of expenses and revenues to a specific accounting period requires an assumption about the length of the accounting period. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.
What Is Time Period Assumption in Accounting?
Become a day trader. 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. 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.
Consistency Across Accounting Periods Accounting periods are established for reporting and analysis purposes. The Matching Principle A primary accounting rule relating to the use of an accounting period is the matching principle. Get Free Newsletters Newsletters. Investors either have to wait for reliability or compromise with relevance.Accounting Period Assumption
Both of these accounting principles allow businesses to allocated expenses and record revenues for specific periods of time. For instance, the revenue recognition principle requires that revenue be recorded when earned. The income statement presents the business performance for a given time period.
Periodicity Assumption or Time Period Assumption
A year-end income statement shows the income and expense performance for the company for the entire year. This concept is different from the going concern concept.
Going concern concept is based on the accounting period for twelve months. It is prepare based on the assessment and assumption that the company may not have any problem in the next twelve months.
Yet, periodicity concept is based on the nature of business, and management requirements.
Periodicity Assumption Accounting principle. Financial Information of an entity can be reported into artificial period of times. Using Financial Statements that is prepared based on the going concern concept is quite difficult for management to control and assess the performance of the companies.
Yet, by using the Financial Statements that prepare based on Periodicity Assumption, management have weekly, monthly or quarterly to assess and analyst the company performance, as well as financial status.