Question

Explain Accounting Period Concept.

Answer 1

1. It is due to this concept that financial statements are prepared at regular intervals, generally one year. This period is called accounting period. The net profit/net loss of business is ascertained separately for each accounting period. Similarly, the financial position of business is ascertained on the last day of an accounting period. Under tax laws, the accounting period starts from 1st April and ends on 31st March next year.
2. The going concern concept states that, a business is assumed to continue indefinitely. As such, the results of business operations can be ascertained only after the liquidation of business. But the measurement of net profit and financial position of the business after a very long period will be of little use to owners, managers, investors and others.
3. The users of financial statements need periodical reports on the performance of business. Therefore, the entire life of the firm is divided into time intervals for the purpose of financial reporting. In accounting, such a time interval is called accounting period. The accounting period is usually one year.
4. Accounting statements are prepared at the end of each year so that the interested parties are able to judge the progress of business. This assumption requires that the expenditure whose benefit will accrue over a long period should be apportioned suitably over each year. This involves a process of estimation.

Answer 2

1. According to this assumption, the activities of an enterprise are divided into artificial time periods for preparing financial statements. In the absence of this assumption, the results of the business can be known only at the end of its life.
2. An ascertainment of profit or loss for different accounting periods facilitates the comparison of the results of successive periods. The accounting period is usually of one year. It tells the performance of a business at regular intervals of time so that timely action can be taken.
3. It provides useful information to interested parties like investors, management, owners, customers, employees, public, creditors, etc.