Accounting period: Overview, definition, and example
What is an accounting period?
An accounting period is a specific time frame used by businesses to track and report their financial activities. It can be a month, quarter, or year, and during this period, a company records its income, expenses, profits, and losses. At the end of the accounting period, the business prepares financial statements to summarize its financial performance. The length of the accounting period depends on the business’s reporting requirements or tax obligations, and many businesses use a fiscal year as their standard accounting period.
In simpler terms, an accounting period is a chunk of time that a business uses to measure and report its financial performance.
Why is an accounting period important?
An accounting period is important because it helps businesses track their financial performance over a defined period, making it easier to manage finances, prepare tax returns, and make business decisions. It ensures consistency and accuracy in financial reporting, which is crucial for monitoring growth, paying taxes, and meeting legal requirements.
For SMB owners, having a clear accounting period is essential for staying organized, meeting regulatory deadlines, and ensuring that financial reports are accurate and up-to-date.
Understanding accounting period through an example
Let’s say your small business operates on a calendar year basis, meaning your accounting period runs from January 1 to December 31. At the end of this accounting period, you will prepare your financial statements, including an income statement and balance sheet, that summarize your business’s performance for the entire year. These financial reports will help you assess your profitability, manage your taxes, and plan for the next year.
Alternatively, your business could choose to use a different accounting period, such as a fiscal year that runs from July 1 to June 30, depending on what works best for your industry or financial needs.
Example of an accounting period clause
Here’s an example of what an accounting period clause might look like in a contract:
“The Company’s accounting period shall be the fiscal year, beginning on July 1 and ending on June 30 of each year. The Company shall prepare financial statements at the end of each accounting period in accordance with generally accepted accounting principles (GAAP).”
Conclusion
An accounting period is a defined time frame used by businesses to track their financial activities and prepare financial statements. For SMB owners, understanding and defining your accounting period is key to staying organized, meeting tax deadlines, and making informed business decisions. Whether you choose a calendar year or fiscal year, having a clear accounting period helps ensure your financial records are accurate and compliant with regulations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.