Accounting concepts include assumptions that define the accounting process for entities. They differ from accounting standards as they do not apply to specific areas. Instead, accounting concepts cover all aspects of the accounting process for entities. The periodicity assumption is one of the crucial accounting concepts.
What does Periodicity Assumption mean?
The periodicity assumption requires companies to divide their activities into measurement intervals. These intervals may differ based on several factors. 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 allows companies to set those periods.
The periodicity assumption states that companies can report their financial results within a specific designated or artificial period. Once companies choose that period, they must follow it consistently. This way, they can allow for better comparisons between their financial information. For companies, it implies that they must separate information from their accounting systems based on those periods. It can significantly impact how companies prepare their financial statements.
How does the Periodicity Assumption impact businesses?
The periodicity assumption impacts how companies report their financial performance. It requires companies to separate that performance based on a specific period. However, it does not specify what that period should be. Instead, it allows companies to choose their reporting timeframe. It also requires this process to be consistent with the timeframe selected previously.
Essentially, the periodicity assumption allows companies to set their reporting periods. As stated above, they can choose between monthly, quarterly, and annual periods. The periodicity assumption helps specify how companies can separate their finances into different timeframes. Consequently, it helps stakeholders understand how performance has changed for the same interval over time.
While the periodicity assumption helps with consistency, it also covers inconsistent periods. In some cases, companies may change their reporting periods to different intervals. It may result in the financial statements being reported for longer or shorter intervals. However, these occur rarely. Nonetheless, the periodicity assumption still supports the accounting during those periods.
Why must entities follow the Periodicity Assumption?
The periodicity assumption lets companies set a reporting timeframe. Consequently, it allows them to set the expectations for their stakeholders. Companies can use this assumption to divide their operations into various periods to present to creditors and investors. With the periodicity assumption, these parties receive more consistent information. This way, companies can attract more finance.
The periodicity assumption also allows stakeholders to analyze a company’s performance better. On top of that, it can also enhance internal reporting by creating specific reporting timeframes. The periodicity assumption also helps inform the users of the financial statements about the period the information covers. It further helps them understand how the company’s performance has changed over time for a similar timeframe.
The periodicity assumption requires companies to report their financial results within a designated period. It entails companies dividing their performance into various periods. For most companies, these periods occur quarterly or annually. The periodicity assumption is of significant importance to both companies and their stakeholders.