These time periods are kept the same over time, for the sake of comparability. Through the periodicity assumption, investors can analyze a company’s performance during a period. With this assumption, companies prepare monthly, quarterly, or annual financial statements.

The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Let’s try to look at an example of how the time period assumption might be used. Another reason is revenue doesn’t always line up with an accounting period, so they use the time period that best represents it. When accountants record business transactions for an entity, they assume it is a going concern. The
going-concern (continuity) assumption states that an entity will continue to operate indefinitely
unless strong evidence exists that the entity will terminate.

Periodicity Assumption Example

From an accounting perspective, producing reports for several reporting periods is very difficult, because business activities need more accruals to be apportioned among the various periods. Formation and presentation of the quarterly financial statement is an example of the periodicity concept. The transaction for a specific month used in the one quarter cannot be used in the next quarter. However, there are still other companies that end their report in June or September each year. Periodicity also allows the manufacturer to report the revenues and net income it earned in each of the months during the two-year contract.

  • One of the key advantages of the periodicity assumption is the ability of businesses to create forecasts and budgets for future periods by looking at past performance.
  • Further, calculation and filing of the tax, budgetary controls, and application of internal controls measure us an additional benefit of periodicity assumption.
  • In contrast to the income statement, the balance sheet reflects the financial status on a particular date.
  • For example, revenue should be reported when it is earned, according to IFRS.

The periodicity assumption in accounting relates to the timing of the financial statements. It states that companies can report financial results within designated periods. Usually, it implies that companies must report their financial results and cash flows consistently. Once companies use a period for reporting, they must keep it the same over time.

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The periodicity assumption is important because it enables a company to stop and measure how successful it has been in achieving its objectives during a particular time period. This information can be used to make timely decisions for the benefit of the company.It also allows for a more accurate comparison of a company’s performance over different periods of time. Investors are usually interested in quarterly financial statements of a business to figure out the performance of a business in the next quarter.

Why Does the Company Use a Different Fiscal Year?

Accounting assumptions help to create a systematic structure for recording and reporting accounting transactions. They also provide a reliable and verifiable base for the financial statements, which can be used to make important decisions. Therefore, it is important to understand the importance of accounting assumptions to ensure the reliability and comparability of financial results. Understanding the importance of accounting assumptions is essential for making sound financial decisions and ensuring the reliability and comparability of financial results. Accounting assumptions provide a framework for recording and reporting financial information and thus help to create credibility and reliability in the financial statements. Furthermore, when the periodicity assumption is used, it becomes easier for the business to implement accounting rules on a regular and uniform basis.

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Further, it’s important to note that auditors need to check periodicity by cutting off testing during audit execution. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including MarketWatch, Bloomberg, Axios, TechCrunch, Forbes, NerdWallet, GreenBiz, Reuters, and many others.

A company’s results may be reported every four weeks, resulting in 13 reporting periods every year. This approach is internally consistent, but the resulting income statements are incongruous when compared to those of an organization that reports using the more standard monthly period. A time period assumption in accounting means that a company uses financial reporting based on its own chosen periods. It depends on what information you are trying to represent with your company’s revenue and expenses.

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Another example would be if a business reported both February and March revenues together because their revenues were about the same. It also enables a company to stop and measure how successful it has been in achieving its objectives during a particular time period and see where improvements can be made. An earth-moving equipment manufacturer may require two years to build a special machine for one of its customers.

For each period, companies plan and distribute a series of financial statements to address the needs of their users. The periodicity assumption works on the criteria for companies to have consistent periods for accounting. As mentioned, companies can choose the duration which those statements cover.

The
business entity concept assumes that each business has an existence separate from its owners,
creditors, employees, customers, interested parties, and other businesses. For each business (such as a
horse stable or a fitness center), the business, not the business owner, is the accounting entity. Therefore, how do internet companies profit if they give away their services for free financial statements are identified as belonging to a particular business entity. The content
of these financial statements reports only on the activities, resources, and obligations of that entity. Most companies follow various accounting principles when preparing their financial statements.