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. Stay on top of your financial activity by using an online invoicing software such as Debitoor. Sign up now! 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 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 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. 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. Just 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. The basic accounting principles serve as bases in preparing, presenting and interpreting financial statements. They lay down the foundations to prevent misunderstandings between and among the preparers and users of financial statements. Going Concern AssumptionThe Conceptual Framework of Accounting, published by the International Accounting Standards Board (IASB), mentions the underlying assumption of going concern. The going concern principle, also known as continuing concern concept or continuity assumption, means that a business entity will continue to operate indefinitely, or at least for another twelve months. Financial statements are prepared with the assumption that the entity will continue to exist in the future, unless otherwise stated. The going concern assumption is the reason assets are generally presented in the balance sheet at cost rather that at fair market value. Long-term assets are included in the books until they are fully utilized and retired. Accrual Basis of AccountingAnother important basic concept is accrual. The accrual method in accounting means that "revenue or income is recognized when earned regardless of when received and expenses are recognized when incurred regardless of when paid". Hence, income is not the same as cash collections and expense is different from cash payments. Under accrual basis, revenues and expenses are recognized when they occur regardless of when the amounts are received or paid. For example, ABC Company rendered repair services to a client on December 9, 2021. The client paid after 30 days – January 8, 2022. When should the income be recognized? – On the date it is considered earned (when the service has already been rendered). Hence, the income should be recognized in December 2021 even if it has not yet been collected as of that date. Another example, suppose ABC Company received its electricity bill for the month of March on April 5 and paid it on April 10. When should the electricity expense be recorded? Correct! – March. Why? Because, the electricity expense was for the month of March even if the bill has been received and paid in April. In other words, the "electricity" was used/consumed in March. Accounting Entity ConceptThe accounting entity concept recognizes a specific business enterprise as one accounting entity, separate and distinct from the owners, managers, and employees of that business. In other words, it means that a company has its own identity set apart from its owners or anyone else. Personal transactions of the owners, managers, and employees must not be mixed with transactions of the company. For example, if ABC Company buys a vehicle to be used as delivery equipment, then it is considered a transaction of the business entity. However, if Mr. A, owner of ABC Company, buys a car for personal use using his own money, that transaction is not recorded in the company's accounting system because it clearly is not a transaction of the company. Time Period (Periodicity)The time period assumption, also known as periodicity assumption, means that the indefinite life of an enterprise is subdivided into time periods (accounting periods) which are usually of equal length for the purpose of preparing financial reports on financial position, performance and cash flows. An accounting period is usually a 12-month period – either calendar or fiscal. A calendar year refers to a 12-month period ending December 31. A fiscal year is a 12-month period ending in any day throughout the year, for example, April 1 to March 31 of the following year. The need for timely reports has led to the preparation of more frequent reports, such as monthly or quarterly statements. Monetary Unit AssumptionThe monetary unit assumption has two characteristics – quantifiability and stability of the currency. Quantifiability means that records should be stated in terms of money, usually in the currency of the country where the financial statements are prepared. Stability of the dollar (or euro, pound, peso, etc.), a.k.a. stable dollar concept means that the purchasing power of the said currency is stable or constant and that any insignificant effect of inflation is ignored. It is to be noted however that financial statements of a company reporting in the currency of a hyperinflationary economy (an economy with very high inflation rate) must be restated, in accordance with applicable accounting standards. Other Principles Derived from the Above ConceptsSome of the other principles in accounting include:
Key Takeaways Going Concern - the assumption is that the entity will continue to operate in the future, unless otherwise stated Accrual - income is recognized when earned regardless of when collected, and expense is recognized when incurred regardless of when paid Accounting Entity - transactions of the business must be separate from personal transactions of the owner/s Periodicity - reports are prepared for specific time periods Monetary Unit - records are expressed in terms of money Web link APA format Basic accounting principles (2022). Accountingverse. Next Lesson → Chapter Outline ≡ What is the time period assumption?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.
Which of the following states that the life of a business can be divided into equal time periods?The time period assumption states that the economic life of a business can be divided into a. equal time periods.
What is an accounting period What is the purpose of dividing the life of the business into accounting periods?An accounting period is the time frame for which a business prepares its financial statements and reports its financial performance and position to external stakeholders. This could be after three, six or twelve months. The accounting period usually coincides with the business' fiscal year.
What is accrual basis assumption?Accrual assumption. Transactions are recorded using the accrual basis of accounting, where the recognition of revenues and expenses arises when earned or used, respectively.
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Which accounting assumption states that the life of the company can be divided into months quarters and years?
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