This concept necessitates that the life of business ought to be isolated into a equal parts which are known as Accounting Periods. This Concept requires consistency of Accounting periods.
Explanation of Accounting Period Concept
This concept helps in evaluating the profit or loss and financial position of a business for a specific period. If there are diverse accounting periods then different issues can emerge like in the calculation of profits, comparability of various incomes and expenses etc. Thus to study the results of a business, the life of a business is isolated into brief times of equivalent length. Each such period is called as accounting period.
While genuine profit or loss of a business must be resolved when the business finally closes down, it would be unwise to wait for that. Accounting information is required by all worried on a regular basis and should, accordingly, be set up on a ongoing basis. For the purpose of having a reliable and comparable set of financial statements, the performance and position of a business is estimated toward the finish of predetermined periods known as accounting periods.
Generally, an accounting period is one year. Hence, an income statement shows the financial performance more than one year while an balance sheet shows the financial position at the end of a year. Not necessarily this year is a calendar year. It might keep running from January to December, or from July of one year to June of the following, or from October to September.
The fact that financial statements are set up in connection to an accounting period requires certain changes. For instance, when a vehicle is purchased its cost must be apportioned over the various accounting periods in which the said will be utilized. The accounting period principle necessitates that such adjustments be judicially made and accounting record of them made accordingly.
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