An accounting period, also referred to as a fiscal period or financial period, is a defined span of time during which a business records its financial transactions and prepares financial statements.
What is an accounting period?
This period serves as the basis for reporting the organisation’s financial performance and position. The duration of an accounting period can vary and is typically chosen based on the specific needs and practices of the business. Common periods include a month, a quarter, or a year.
The primary reason for establishing an accounting period is to systematically organise financial data, enabling accurate and meaningful presentation of a business’s economic activities. Financial statements, such as the income statement, balance sheet, and cash flow statement, are generated at the conclusion of each accounting period. These statements offer a consolidated view of revenue, expenses, assets, liabilities, and cash flows during the specified timeframe.
Beyond financial reporting, accounting periods play an important role in budgeting and planning. Businesses align their budgets with specific periods to monitor and evaluate performance against predetermined expectations. For tax reporting, it’s usually necessary to follow a specific accounting period that lines up with the fiscal year.
Example of accounting period
Let’s consider a short example of a monthly accounting period for a small business, XYZ Services:
- During January, XYZ Services provides consulting services and invoices clients for £10,000.
- Incurs monthly operating expenses, including rent and utilities, totaling £5,000.
At the end of January, the financial summary for reporting purposes is:
Revenue = £10,000
Expenses = £5,000
This represents a snapshot of XYZ Services’ financial position for the specific month of January. The company will repeat this process each month.