Accounting periods are an important element of an accounting strategy. They are used by all types of businesses, including small businesses and large businesses. The term “accounting period” is fairly straightforward. It refers to a period of time during which financial transactions are recorded. With that said, there are several things you should know about accounting periods when using them in your business’s accounting strategy.
Overview of Accounting Periods
An accounting period refers to a period of time during which financial transactions are recorded. A calendar year, for example, can be an accounting period. When using a calendar year as an accounting period, you’ll need to group your business’s transactions by the year in which they occurred. Each calendar year starts on January 1 and ends on December 31. Therefore, calendar years are commonly used as accounting periods.
Why Accounting Periods Are Important
You might be wondering why accounting periods are important? For starters, they serve as the foundation for a given business’s accounting strategy. With accounting periods, you can easily review all of your business’s transactions for a particular period of time. If you know what a transaction occurred, you can pull up the accounting period for that time. Doing so will reveal all of the transactions for that time.
There are also requirements regarding which type of accounting period some businesses can use. Publicly traded businesses, for instance, must release four earnings reports each year. Therefore, they are required to use four accounting periods for each calendar year.
The Different Types of Accounting Periods
There are different types of accounting periods. As previously mentioned, calendar years are commonly used as accounting periods. Most small businesses use calendar year-based accounting periods because it’s simple and convenient.
Fiscal years can be used as accounting periods as well. A fiscal year isn’t the same as a calendar year. A fiscal year is defined as any year-long period consisting of 12 whole months. It doesn’t have to begin on January 1, nor does it have to end on December 31. A fiscal year can start on any day of the year, but it must end exactly 12 months later, resulting in a complete fiscal year.
Accounting periods can be quarterly as well. Publicly traded businesses are required to use quarterly accounting periods. Quarterly accounting periods consist of three-month periods. Businesses can use multiple types of accounting periods. Some publicly traded businesses, for example, use either calendar or fiscal year accounting periods in conjunction with quarterly accounting periods.
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