Accounting / Bookkeeping Basics: Time Period Principle

The Time Period Consistency is an important element when reporting financial information. Without consistency, it would be impossible to compare one period to the next. For example, imagine that a company releases two statements; one weekly and one monthly. You could not use these two statements to calculate ratios or compare the two financial statements in any way and expect to get an accurate representation of the company’s financial standings. The time period assumption exists to ensure businesses report in a consistent manner and in accordance with recognized financial periods. Even though they may create internal reports monthly (or even weekly in some cases), most companies are required to provide financial statements at least once per year. Often, they help customers keep track of their earnings by reporting quarterly as well, which is approximately every three months.

What is the Time Period Principle?
The time period principle describes different reporting periods for a business, usually over a standard period of time. Financial results are usually reported monthly, quarterly, or annually, though a combination of these is usually used. Monthly are most common for internal reports, as these help business owners make decisions about how to best allocate resources and notice possible problems and trends. This principle is also known as the periodicity assumption.

The periods describe a certain time within a business. A business’ periodicity is divided into accounting periods for its entire lifetime, usually into accounting periods with the same length. When creating a financial statement, a header is included that describes the time period. Statements should also include dates. When choosing which financial transactions to include, as well as which revenues and expenses should be realized, all the information included on and pertaining to that financial statement should fall within the dates mentioned at the top of the statement.

Why is the Time Period Principle Important?
In addition to establishing a consistent period of time for financial analysis, the time period principle allows companies to take an accurate screenshot of their financial standings. With time periods, businesses can recognize revenue and expenses as they are incurred by period.
The time period principle is one applied to all areas of accounting. Even companies using the cash-basis method of accounting will need to use this principle to create segments of time in their business. Then, finances can be reported in these periods.

Frequency of Reports and the Fiscal Year
In most cases, companies generate external reports at least once annually. In this case, the accounting period lasts 12 months. Some companies choose to begin their year on January 1 and end on December 31. For others, a fiscal accounting year is used. This can be any day, as long as it is an annual period. For example,  a company might release its financial statements from March 1 of one year to February 2 of the next. Accounting reports are released more frequently when a timely report is needed.
The fiscal year is ideal for companies that experience high levels of sales during the holidays, such as retail locations or jewelers. Companies may also choose their financial fiscal year depending on the official start date of their company. Time periods can be thought of as artificial, as there is no specific guideline for which dates a company must use to report.
The decision on how to use periodicity is usually made at the start of a company. They must decide if they are going to report their revenue as is and report for a partial year (such as a company that begins their startup in May or June) or if they are going to report using a fiscal period. Even though some companies opt for a fiscal period, they may choose to do this using dates that are near those when taxes are due. Otherwise, they would end preparing separate financial statements when filing taxes and when reporting to other external parties, which is not a good use of company time.
The Time Period Principle and Other Principles
For the matching principle and the revenue recognition principle to be followed, companies must be able to have time periods to match their revenues and expenses to. Otherwise, the matching of revenues and expenses would be irrelevant and immeasurable. Not to mention, without the time period principle, trying to report any kind of financial information would be messy,  unverifiable, and unreliable.The time period principle is also closely related to the going concern principle. As businesses operate as if they are going to remain in business, they can accrue accounts payable and accounts receivable. This gives flexibility when reporting, while still adhering to the time period principle and the principles of revenue recognition and matching.