Periodicity assumption states the company needs to report financial information in such a manner that the current period can be compared with the previous periods. In other words, the company needs to use specific/designated periods for reporting purpose. For instance, the company can report its financial information/performance monthly, quarterly or yearly and so on. Show
It’s important to note that the periodicity assumption is not about the number of days but the specific number of days. For instance, thirty days’ business performance in April can be compared with the thirty days’ performance in March. It’s not like you can compare thirty days’ performance of April by taking 15 days from April and 15 days from March. So, the financial reporting period needs to be comparable and that’s only possible when the business complies periodicity assumption. Similarly, there is a need to compare specific periods against specific periods. For instance, monthly performance can be compared with the month; quarterly performance can be compared with the quarter, yearly with yearly and so on. What is year on year comparison? Detailed explanationThe companies need to record thousands of accounting transactions daily. These transactions are summarized in a report format to be used by investors. The companies report their financial performance weekly, monthly or yearly. In the context of periodicity assumption, the company needs to select some specific period to report their financial information. For instance, ABC Limited starts yearly reporting on the first day of January and ends on the last day of December. So, the company must ensure the exact dates are followed in the next financial reporting period. Otherwise, users of a financial statement may not be able to compare financial information as it won’t be like by like. Hence, the purpose of the periodicity assumption is to ensure dates used in the reporting periods can be compared. Importance of periodicity assumptionThe investors need to compare the economic activities of the business from period to period. It helps to locate if the business has performed well or if there is a need to improve at some operational /strategic level. It means the decision of the financial statement users is dependent on the periodicity. Hence, management needs to ensure the periodicity concept is followed in accounting. Further, it’s important to note that auditors need to check periodicity by cutting off testing during audit execution. Eureka construction limited prepares a yearly financial statement for the period between January 1st and December 31st. The financial statement for 2020 and 2021 was prepared for the exact dates from January 1 to December 31st. It’s compliance with the periodicity concept. It’s because performance in the year 2021 can be compared with the performance in 2020. ConclusionThe periodicity assumption states that the company needs to prepare a financial statement for periods that be compared. It helps users of the financial statement to compare and locate business performance. If periods to be compared are inconsistent, there is a need to adjust periods accordingly. Frequently asked questionsWhy is periodicity important in accounting? It enables financial statement users to compare periodic performance. Hence, it’s an important assumption from a financial analysis perspective. How does the periodicity assumption affect an accountant’s analysis of accounting transactions? The periodicity assumption enables accountants to compare periods with each other. And we understand comparison is an excellent tool to conduct financial analysis. Hence, periodicity assumption impacts on the accountant’s analysis of accounting transactions. Is the periodicity concept same as going concern assumption? No, the periodicity concept is very different from going concern. Periodicity assumption is limited to the selection of reporting periods. On the contrary, the going concern assumption is about the overall ability of the business to remain operational for a foreseeable period. The time period principle (or time period assumption) is an accounting principle which states that a business should report their financial statements appropriate to a specific time period.
In financial terms, a time period is often referred to as the accounting year, or accounting and reporting time periods. These periods can be quarterly, half yearly, annually, or any other interval depending on the business’ and owners’ preference. The time period concept is one of the fundamental accounting principles and rules, applicable to both cash accounting and accrual accounting. The importance of time period principleThe financial statements of any business tell a story of the business’s activities and their position at a certain point in time. Therefore, the importance of the time period principle is to inform any readers about the time period for which the financial statements have been prepared. The general concept of the time period principle assumes that all businesses can divide their financial activities into artificial time periods. In other words, all revenues and expenses can be systematically assigned to distinctive and consecutive accounting time periods. However, not all transactions can easily be assigned to a specific time period. In these cases, the transactions and the period need to be estimated to a specific time period. An example of this is depreciation for equipment expenses, which depends on the estimated number of years which the fixed asset will be functioning and in use. The time period principle and your accountingThe time period principle allows for your accountant to measure your business performance. If you do not divide time into specific periods, it will be difficult for your accountant to separate transactions that occurred in different time periods. Furthermore, if your business transactions are not recorded in different time periods, it will not be possible to compare transactions against each other, or to measure the business position and other financial aspects. Which financial statements are we talking about?When we talk about preparing and recording the financial statements appropriate to a specific time period, we are talking about income statements, balance sheets, statement of cash flows, and statement of changes in equity. The time period principle and other accounting principlesJust like the time period principle, there are a few other accounting principles with are also concerned with income measurement assumptions. These include the matching principle, and the going concern principle. The matching principle states that each revenue recorded should be matched with the related expenses at the same time. In other words, for every debit there should be a corresponding credit (and vice versa). The matching principle is therefore dependant on the time period principle, since in order to allocate revenues and expenses to a specific accounting time period it is first necessary to determine the length of these accounting periods. Another connection to the time period principle, is the going concern principle. The going concern principle states that businesses should assume they will continue to operate and exist in the foreseeable future, and not liquidate. This assumption therefore allows businesses to defer some accrued expenses to future accounting periods. In order to do so, the an accounting period needs to be defined, which is where the time period principle comes in. Debitoor and the time period principleDebitoor invoicing software aims to help you comply with accounting principles by using an automated system to match your transactions as easily and quickly as possible. One of the features in our larger subscription plans allows you to upload your bank statements which will automatically match each payment to the corresponding invoice or expense. Why is the time period assumption important?Time period assumptions are used to provide a more accurate picture of the value of assets and liabilities held for long periods and how business is doing throughout each month or quarter.
What is time period assumption in business?The time period principle (or time period assumption) is an accounting principle which states that a business should report their financial statements appropriate to a specific time period.
What is the periodicity assumption?The periodicity assumption states that an organization can report its financial results within certain designated periods of time. This typically means that an entity consistently reports its results and cash flows on a monthly, quarterly, or annual basis.
What is time period or periodicity concept?The periodicity concept, can be also called the time interval concept, is a period during which business enterprises are required to prepare financial statement at specified intervals.
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