What Is an Accounting Period?
Business happens in real time, but it can take time for everything else to catch up. This includes accounting. Sure, financial transactions may happen instantly, but account reconciliation happens at scheduled times. As a result, many businesses use an accounting period to produce essential financial documentation. During these periods, the business makes a concerted effort to balance its books and get everything current.
Accounting periods serve several very important purposes. Internally, they represent deadlines for the company, such as when interdepartmental budgets are due. For investors and shareholders, they represent a time when the company’s financials become available for review. For regulatory agencies, accounting periods are when these bodies can expect to see pertinent data for the purposes of reporting.
An accounting period gives a snapshot into the financial state of a company. It’s an opportunity for organization, analysis and scrutiny by various parties.
Understanding Accounting Periods
Depending on their purpose, accounting periods can cover different lengths of time. Moreover, they can occur at different points throughout the year. Some of the most common accounting periods (GAAP-recognized) include:
- Calendar year. This represents 12 consecutive months, beginning on January 1 and running through December 31. It’s common in contextualizing seasonal financial information over the course of the year.
- Fiscal year. This represents 12 consecutive months beginning any day and ending on the last day of the 12th month (other than December 31). It’s most often used to contextualize the company’s prior-year financials.
- Quarter. This represents a three-month sequential increment following any of the following time frames: January to March, April to June, July to September, or October to December. They’re used for intra-year analysis of cash flow.
- Month. This represents any single month of the year, beginning on the first day and ending on the last day. These periods are rarely useful in a vacuum and are instead best served to contextualize budgets, sales performance or prior period figures.
Calendar year and fiscal year are the two most prevalent accounting periods. This is because they represent macro trends in a company’s cash flow and financial health. For example, investors may compare the company’s fiscal year earnings with the previous fiscal year to gauge year-over-year growth while eliminating month-to-month inconsistencies.
Consistency Is Key for Accounting Periods
As with all generally accepted accounting principles (GAAP), consistency is key for accounting periods. Because these periods give a measure of the company’s financial health during a specific window, these windows must stay consistent with each report. For example, it’s pointless to compare a company’s Q1 figures with a 15-day stretch in the middle of September. Moreover, comparing calendar year earnings to fiscal year earnings is an apples-to-oranges comparison.
Beyond the accounting period, the factors reported for that period also require consistency. This is often why companies use accrual basis reporting for accounting periods instead of cash basis accounting. Accrual records transactions at the point of origination for an accurate depiction of when assets and liabilities appear and disappear from the balance sheet.
In following GAAP principles, businesses will provide the same type of information for the same type of accounting period, consistently. For example, Company ABC will provide previous-quarter figures (Form 10-Q) to investors 14 days after the close of the quarter. For public companies, this is an earnings report.
Matching Principle Is a Defining Requirement
In conjunction with the concept of accrual basis accounting, it’s important for businesses to follow the matching principle. This concept states that during an accounting period, businesses should report complete financial transactions, both expenses and revenue. For example, if a company reports the cost of goods sold for a product during Q1, it should also report the revenue associated with the sale.
The concept behind the matching principle is to be as complete as possible in reporting. This ensures investors, analysts and agencies have the information and context they need to draw accurate conclusions about a company’s financial health. Missing or incomplete information increases the margin for error.
Types of Reporting Common to Accounting Periods
Accounting reports are a staple of accounting periods. Reports provide consolidated financial information to the parties most interested in it. These reports differ depending on the audience. For example, a chief financial officer (CFO) may want a detailed P/L statement each month. Investors may require a more complete and comprehensive accounting of the company’s finances. Some of the common types of formal reporting for accounting periods include…
- Form 10-Q. A quarterly report that supplements the annual Form 10-K filing with pertinent information. Companies must file this form for the first three quarters of the fiscal year.
- Form 10-K. An annual report of the company’s ongoing financial health. Companies must file this form within 90 days of the end of the fiscal year.
- Form 8-K. There is no standard requirement for issuing Form 8-K. Most companies choose to file one after a major financial event, such as a bankruptcy filing, acquisition, sale of new stock or similar.
SEC rules require that public companies file these reports according to their accounting periods. These reports are free and accessible to any investor who wants to review them.
Pay Attention to Accounting Periods
Investors need to pay attention to accounting periods because they signal the opportunity to learn more about the companies they have a position in – or plan to invest in. Not only do these periods offer a snapshot of company finances, they also tell a story about cash flow and financial health. Pay close attention to accounting periods and the information provided. Then use this information to invest wisely.
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