Periodicity Concept -According to this concept accounts should be prepared after every period and not at the end of the life of the entity. Usually, this period is one calendar year. In India, we follow from 1st April of a year to 31st March of the immediately following year.
Periodicity Concept In Detailed
This is also called the concept of de nite accounting period. As per the ‘going concern’ concept, an indefinite life of the entity is assumed. For a business entity, it causes inconvenience to measure performance achieved by the entity in the ordinary course of business.
If a textile mill lasts for 100 years, it is not desirable to measure its performance as well as Financial position only at the end of its life. Must Check Cash Basis Vs Accrual Basis of Accounting.
So a small but workable fraction of time is chosen out of in nite life cycle of the business entity for measuring performance and looking at the Financial position. Generally, one year period is taken up for performance measurement and appraisal of Financial position. However, it may also be 6 months 9 months, or 15 months.
According to this concept accounts should be prepared after every period and not at the end of the life of the entity. Usually, this period is one calendar year. In India, we follow from 1st April of a year to 31st March of the immediately following year.
Thus, for performance appraisal, it is not necessary to look into the revenue and expenses of an unduly long time frame. This concept makes the accounting system workable and the term ‘accrual’ meaningful. If one thinks of a nighttime frame, nothing will accrue. There cannot be unpaid expenses and non-receipt of revenue. Accrued expenses or accrued revenue is only concerning a nite time-frame which is called accounting period. Thus, the periodicity concept facilitates in :
- (i) Comparing Financial statements of different periods
- (ii) Uniform and consistent accounting treatment for ascertaining the pro and assets of the business
- (iii) Matching periodic revenues with expenses for getting correct results of the business operations
In more Simple Words
This concept derives from the going-concern concept. As we have earlier seen, a business enterprise is assumed to continue operations for an indefinite future unless the contrary is known. However, investors and other users of an entity’s accounting information cannot afford to wait forever for the information that they require for their diverse needs. To meet their needs, the “life span” of the entity is broken into arbitrary specified periods that are shorter than the life of the enterprise. Must Read Steps to Locate Errors.
A 12-month period (one year) is the usual reporting period. Businesses also report summarized financial information on an interim basis: half-yearly, quarterly, or even monthly. This is the concept called periodicity, time-period assumption, or simply accounting period. The period is usually identified in the financial statements.
Periodicity enables users of the reports to make comparisons of information between definite periods and amongst companies in the same industry (as a basis for decision-making). Such an advantage aside, the periodicity concept has certain drawbacks. For example, the concept assumes that business transactions can be identified with particular periods even when we know that some transactions (e.g. buying a fixed asset), have consequences for many periods.
Also, the determination of income on a periodic basis, as implied by the concept, leads to comparisons of the results of successive periods. Such comparisons may be misleading as the pattern of business activity changes over time. Moreover, periodic accounts require arbitrary allocation and apportionment methods. Must Check Going Concern Concept.
