The company makes
no adjustments for the difference between the values of the 1975 dollar and the 2008 dollar. Both
dollars are treated as equal monetary units of measurement despite substantial price inflation over the
30-year period. Accountants and business executives have expressed concern over this inflation
problem, especially during periods of high inflation. Although the periodicity assumption is highly beneficial for financial accounting, it does have its limitations. This concept is prepared according to nature and life cycle rather than the accounting period. Please give an example of the accounting concept “Periodicity”being applied to a company’s financial statement or notes.

The periodicity assumption is an accounting principle that states that a company’s economic activities can be divided into distinct periods. The periodicity assumption separates time into distinct, consecutive periods. On the contrary, the going concern assumption is about the overall ability of the business to remain operational for a foreseeable period. These transactions are summarized in a report format to be used by investors.

To implement the periodicity assumptions practically, the business needs to understand and identify which time frame (i.e., monthly or quarterly) is better for preparing financial statements. So, after selecting an appropriate time frame, effective internal controls must be applied to ensure good quality periodic financial statements. The periodicity assumption or time period assumption states that businesses can divide up their activities into artificial time periods.

How does the periodicity assumption affect an accountant’s analysis of accounting transactions?

Usually, companies can use a monthly, quarterly, or annual cycle for reporting purposes. This way, they can report their financial activities within designated periods. The periodicity assumption requires a company to disclose its financial information, in the same way, each time it reports its financials. However, there are also some disadvantages, such as how too many assumptions made about revenue and expenses over shorter periods may lead to losing important information. It’s also possible that these assumptions can make it difficult for readers who are unfamiliar with how they work in financial statements.

  • Thus, accrual-basis accounting is reflective of measuring revenues as earned and expenses as incurred.
  • Without a monetary unit, it would be impossible to add such
    items as buildings, equipment, and inventory on a balance sheet.
  • The primary goal of analyzing trends in a company’s financial ratios and other data is to identify anomalies and forecast the future.
  • Financial Reports could be prepared and presented in an artificial period of time.
  • This prevents businesses from overstating their revenue by recording income before it has been earned or understating their costs by recording expenses after they have been incurred.

Utilizing financial reports that are readied based on the going concern idea is very hard for the executives to control and evaluate the presentation of the organizations. Cut off is when accounting period changes and subsequent transactions need to be posted in the following accounting periods. You should do what you think works best for your company while being transparent with your readers about any assumptions made to provide the most accurate picture possible. For instance, a large business
(such as General Motors Corporation) may consist of several separate corporations, each of which is a
separate legal entity.

This assumption allows users to make decisions based on a company’s financial performance without having to wait for the end of the year. This usually means disclosing revenue and expenses on an income statement for monthly, quarterly, or annual periods. In addition to this, some businesses may require the management to look around what’s happening in the company and market. So, under those circumstances, it won’t be a feasible option to wait for the year-end financial statements. The critical analysis of monthly or quarterly financial statements will be the right choice in such a situation.

What is Periodicity Assumption? (Explanation)

According to the periodicity (time periods) assumption, accountants divide an entity’s life
into months or years to report its economic activities. Then, accountants attempt to prepare accurate
reports on the entity’s activities for these periods. These time periods are usually of equal length so
that statement users can make valid comparisons of a company’s performance from period to period. The length of the accounting period must be stated in the financial statements. For instance, so far, the
income statements in this text were for either one month or one year.

This team of experts helps Carbon Collective maintain the highest level of accuracy and professionalism possible. Carbon Collective partners with financial and climate experts to ensure the accuracy of our content. Let’s consider an example of a manufacturing company that buys a machine for its production process.

Inconsistent Accounting Periods

Also, if a company has experienced significant fluctuations between different months, they might change their reporting timeframe from one month to every three months. Readers can see that there is $100 million in total revenue, but they don’t know much about how it was earned or what months were particularly strong or weak. Most of the company follow the calendar year which starts at January and end with December) as the basis to prepare a financial report. Financial statements identify their unit of measure (such as the dollar in the United States) so the
statement user can make valid comparisons of amounts. For example, it would be difficult to compare
relative asset amounts or profitability of a company reporting in US dollars with a company reporting
in Japanese yen. For example, management is considering investing in new projects similar to the existing ones.

Therefore, it may not suit stakeholders to use those statements to compare the information. Companies must also state the period used in the headings in each financial statement. This requirement also comes from the formats laid by the accounting standards. Correctly assigning revenues and expenses to time periods is pivotal in the determination of income. It goes without saying that reported income is of great concern to investors and creditors, and its proper determination is crucial.

How much are you saving for retirement each month?

It’s best to try different methods to see your company’s information when making financial reporting decisions. Companies might use just one time period assumption for all their income statements or change the time frame depending on what information is being presented. knowing your customers For example, companies might use one time period assumption for their income statement and another time period assumption for the other financial statements. – The income statement is the financial statement that best shows the periodicity assumption.

Company

Based on Periodicity Assumption, the Financial Statements could be prepared and presented weekly, monthly, quarterly, annually, or in other artificial time frames. Operating the business occasionally requires the executives to recognize what precisely occurs in the company as well as outside of it, which includes the general market. This is done so that the results of multiple years can be compared every quarter. The period for which a financial statement is prepared appears in its heading. For example, a company could report on an income statement that it has $100 million in revenue over six months instead of reporting $200 million if it had used one full year.

Hence, management needs to ensure the periodicity concept is followed in accounting. It’s important to note that the periodicity assumption is not about the number of days but the specific number of days. For instance, thirty days’ business performance in April can be compared with the thirty days’ performance in March.