What is an accounting period?
An accounting period refers to the timeframe that a company uses to track and report its financial activities. In other words, the accounting period defines the start and end date for a company to measure its financial performance and perform key accounting functions.
While this may seem a bit redundant, accounting periods are important for determining when a company will prepare financial statements, and which transactions will be included.
It also provides an objective way for teams to compare current performance against historical data.
What are requirements for accounting periods?
Teams generally have the flexibility to choose the accounting period that works best for their reporting needs.
Regardless of the accounting period a company uses, it must apply it consistently over time to ensure accuracy in financial reporting and tax compliance.
Further, they must use an annual accounting period to report income and expenses for tax-related purposes. But, they could also use a quarterly or monthly period for internal reporting needs.
Different types of accounting periods
As mentioned above, there are several common accounting periods that businesses will use for financial reporting. Here’s a closer look at some of the options teams might consider:
Fiscal year
A fiscal year accounting period covers a 12-month period that ends on the last day of any month other than December. As an example, a company could have a fiscal year that starts on July 1st and ends June 30th of the following year.
The purpose of using a fiscal year rather than a calendar year period is to consider the cyclicality of certain business models.
For instance, retailers tend to have peak sales around the holiday season. So, ending the period on December 31st may misrepresent sales growth throughout the year, only to start off the next year with a large drop.
Calendar year
As one might assume, the calendar year accounting period starts on January 1st and ends December 31st.
Given the simplicity of this period around the standard calendar year, this is a common option among small and medium businesses.
Quarterly Period
Some teams may decide to report financial performance on a quarterly basis, aside from their yearly reporting requirements for tax agencies.
Quarterly reporting is also a requirement for publicly-traded companies by the Securities and Exchange Commission (SEC).
Either way, teams who follow a quarterly accounting period will also need to follow an annual period, whether fiscal year or calendar year to meet tax reporting requirements.
Monthly Period
The monthly accounting period is used by companies who want frequent reporting of financial health throughout the quarter or year.
This is used for internal decision-making purposes, and will be accompanied by annual reporting at the end of the calendar or fiscal year.
3 Essential principles for accounting periods
Accounting periods are used to regularly report on a company’s financial performance. With this, there are some key accounting principles that teams must follow.
1. Accrual method of accounting
Under accrual-based accounting, expenses and revenues are reported in the period they’re incurred, not when the cash is actually exchanged.
This provides a more accurate picture of the financial activities that occurred during a give period, especially when purchases are bought on credit or prepaid.
2. Revenue recognition principle
On this note, the revenue recognition principle says that revenue should be recorded in the period when it’s earned, even if the cash has not yet been received.
For example, let’s say a company follows a calendar year accounting period and sells a piece of equipment in December 2025 for $25,000 net 60. The customer doesn’t make the payment until January, though this is still reported as a sale for 2025 under accrual-based accounting.
3. Matching principle
The matching principle, or expense recognition principle, states that expenses must be reported in the same accounting period as the revenues they helped to generate.
Like the revenue recognition principle, expenses must be recognized even if the cash has yet to be paid to the supplier or vendor.
Using the scenario from above, if the salesperson who sold the equipment earns a 5% commission on the sale when the customer pays, this should be recorded as an expense during the 2025 period, not the following year.
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Frequently asked questions
What is the 12-month accounting period?
The 12-month accounting period is an annual timeframe over which a company tracks and reports its financial activities. To follow a 12-month accounting period, companies can either use a calendar year period or a fiscal year period.
How do I know my accounting period?
Each team determines its own accounting period to follow. If you’re unsure which type your company uses, ask the accounting department. Alternatively, refer back to previous periods’ financial statements, as the end of the fiscal year is often listed at the top of the statement.
Why are adjustments needed at the end of an accounting period?
Accountants may need to adjust journal entries at the end of the accounting period to reflect what actually occurred during that timeframe. This helps ensure accurate reporting and complies with the revenue recognition and matching principles under accrual-based accounting.
What are period costs in accounting?
Period costs refer to expenses that are incurred to support general operations rather than production of a specific good or service. They are reported in the same period as direct costs on the income statement.
Which group of accounts may require adjustments at the end of the accounting period?
Certain accounts are more prone to adjusting journal entires at the end of the accounting period. This includes accounts that track accruals and deferrals, like unearned revenue, prepaid expenses, accrued expenses, and others.
